Rental Properties vs. Owner Finance
***This is our first guest post and it is from a real expert in single family investing. I highly recommend reading this one! -Will
My name is Nick Disney. I am the owner of Sell My San Antonio House, and we are local San Antonio real estate investors. We buy houses in San Antonio, TX, and after we have made the necessary repairs to the properties, we like to either turn those properties into rentals or sell them with owner financing.
The main focus of my investment business is to create positive monthly cash flow. That is why we like to turn those properties into either rentals or create notes by owner financing. But wait…why do both? Is one better than the other? How do I know which I should do?
In this article, let’s take a look at those questions as well as some of the positives and drawbacks for both. Hopefully by the end you will have a little more knowledge and be able to decide if one of them or both of them are right for you and your goals.
Most people understand the basic idea behind rental properties. You buy a property, lease that property to tenants, and collect a monthly rent that should cover your mortgage payment and provide a little extra cash. That extra cash or cash flow is one of the many reasons people get into real estate investing and just so happens to be my favorite part!
Owning rental properties also provides other benefits besides cash flow. If you buy those properties at a discount, you can force immediate appreciation by repairing the properties. Over time, as you pay down the mortgages on those properties, and with single family properties appreciating at an average of 4-5% per year, you will continue to gain equity that you can cash in on when the time is right. There are also many tax advantages that you can leverage when you own rental property.
Things will break on houses…and the more house you own, the more repairs you will have to deal with. As you increase the number of rentals you own, you will also increase the number of tenants you are managing or at a minimum the amount you need to manage your property managers. I’m not saying that this is a bad thing…it is part of growing a larger portfolio of rental properties, and it has paid off hugely for me as I have been growing my business. Rather, I am saying that as you look at the actual (i.e. net) cash flow that you get to keep, this may not always be the best way to grow your cash flow.
I firmly believe that rental property is one of the best ways for your average person to increase their net worth and create wealth that can be used later or left for future generations. But…is owning rental property the best way to create cash flow? Maybe and maybe not, let’s look at another real estate investing option called owner financing.
When using owner financing as an investment strategy, you will buy a property, make the necessary repairs, and then sell that property to a new homeowner and accept monthly payments instead of a lump-sum of the sales price. These monthly payments of principal and interest are what make up your cash flow in owner financing (and don’t forget you get a down payment).
Owner financing offers you a great way to create positive cash flow and has some advantages that owning rental property does not. Because you do not own the property, you are not responsible for the things that come along with owning real estate. A big one is repairs…you wouldn’t call your mortgage company if your toilet backs up or your dishwasher breaks. Since you are now the mortgage company and not the landlord, you won’t be receiving these calls either.
You also avoid things like property tax increases, tenant turnover, and landlord liability. But for me, one of the biggest advantages was the ability to scale my cashflow through notes without increasing how much time I was working in my business. It is a lot easier to manage 20 well performing notes than it is to manage 20 great rental properties.
As my business has grown, I was looking for ways to increase my cash flow without increasing how much time I was spending in the business. For me, because once I have created a well performing note, it now takes very little of my time, owner finance was a great option.
Is owner financing all candy canes and unicorns…No, it is not. You will have people who do not pay and eventually you will probably be forced to foreclose on someone and then repair that house. But, I have found that it is much less involved than owning rental property.
The benefits of owner financing should be balanced with its drawbacks, such as not owning the property and therefore not capturing that appreciation. It is also much easier to leverage rental properties with a bank when you are looking to pull out cash and expand your portfolio.
So…Which Is Better?
Well…it depends…It depends on your specific goals. Is your goal to create as much cash flow as possible? Are you looking to create long-term wealth that can be there to pass along to your children? Or if you are like me, is it a combination of both?
Owner financing creates more cash flow than rental properties. It is also easier to manage 30 notes compared to managing 30 rental properties. But…you are selling the property. So, after the note has been paid off, you no longer have an asset. As opposed to rental property, where you continue to own the property, the mortgage gets paid down and you continue to benefit from the appreciation of the asset for as long as you choose to own it.
Herein lies the argument that you will often hear from different real estate investors. Some will tell you that owner finance is the greatest thing since sliced bread and how could you ever be so foolish as to want to own rental property…then the investors on the rental side will argue that giving up all that equity and appreciation is absolutely insane.
Why not use both?? Would you like as much cash flow as possible? I think you would probably say, “Yes!” Would you like to benefit from the appreciation and increase your net worth by owning additional property? I bet you would give me the same, “Yes!” Well, I have been doing this for a while and I have never seen one rule that says you have to choose one or the other…
I would encourage you to do this: Take a look at your plan and break down your goals. If they involve cash flow then you have two great options to be part of your plan. Maybe this year is the year to acquire a couple more rentals…maybe you have a few rentals but the cash flow isn’t quite where you would like and you would benefit more from creating a few notes to boost your cash flow.
There is no one that can decide what is best for you, other than you! Make sure you look at all your options and then decide which is best to help you reach your goals. Once you decide…get focused…execute…and I look forward to hearing your success story!
One last note from Home Again properties: WOW!! This guys is not just starting out in this business. He is the real deal. Thank you Nick for writing this post to illuminate the power of having both of these strategies working for you in your portfolio!