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 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!

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