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Pros and Cons of Alternative Financing for Investment Properties
1. Pros and Cons of Alternative Financing for Investment
Properties
Does it make sense to use alternative methods of financing
for investment properties?
It doesn’t matter whether you’ve been in the real estate investment business for
decades or you’re just starting to get involved, one of the most important things to
consider is the best way to sell your properties. Should you use alternative methods for
financing investment properties you’re selling? In other words, should you offer the
2. buyer any special deals? If the answer is yes, this is called Alternative Exit Strategies or
Alternative Selling Strategies. The point is, do you want to tie yourself up holding on to a
property or do you just want to get rid of it, even if you take a hit when you sell?
Conventional Home Sale
Let’s take a look at a typical house sale and see what makes the most sense. Let’s say
you have an investment home that you’ve bought and rehabbed, and you’ve set a sale
price of $175K. It’s a fair price, it’s at market value and everything seems right. But what
happens if the house doesn’t sell? Do you sit on it and hope for the best? Do you lower
the price? If so, what do you lower it to? Let’s say you decide to lower the price and it
ends up being sold at $152K. After closing costs and realtor commissions and seller
concessions, you’re probably only going to net about $135K.
Alternative Method for Selling the Home
Let’s say you’re able to sell the home to a rent to own buyer or a lease option buyer,
and you’re able to get full price of $175K. You also get their option deposit – let’s say
they give you $8.75K (5% down) in option deposit money. But then you’ll probably have
your own closing costs in the future along with real estate commissions. So you end up
netting about $150K in net proceeds from that future sale. But you also got $8.75k down
today, so your net proceeds are really $158.75K. Then you’re going to have cash flow
every month for the next 12 to 24 months. You’re also going to be paying down the
principal and creating equity. That might be another $200 a month. You also get to
depreciate the property on your taxes at about 3.5% of the property value. Plus you
have a lower tax bracket because it’s capital gains taxes instead of ordinary income tax.
The Bottom Line
So at the end of the day you’ve netted from this sale, with all the different tax benefits,
about $175K net over the course of that one or two year agreement. This alternative
financing exit strategy simply gives you more money. It seems like a no brainer, don’t
you think?
You didn’t miss Josh’s podcast on lease options and alternative financing for investment
properties, did you? If so, do yourself a favor and subscribe to the podcast Real Estate
Investing Made Easy and you’ll never miss out again. It’s free. It’s easy. You’ll learn
something!