To succeed in today’s market, self-storage investors need to equip themselves with as many tools as possible. One resource many buyers overlook is seller financing. We’ve personally used this option to fund deals of every size, including some as large as seven figures! It can be a powerful implement, however, it must be used the right way.
In this real estate agreement, the seller underwrites the mortgage instead of a financial institution. In simpler terms, they become the bank. The primary advantage is the owner has a long-term vested interest in the property, which allows for better negotiation of terms and deal structure.
If you’re interested in pursuing this option, educating your seller is the first step. If they don’t understand this process, they’ll likely be reluctant to have a conversation about it. The key is to explain what seller financing is and how it can benefit both parties. Of course, it helps when they have an open mind about tax-advantage strategies, long-term passive income and the property’s future success.
Now that you know what seller financing is, how can you use it to win deals in this hyper-competitive, ever-changing self-storage market? One situation in which we like to present this option is when a seller won’t negotiate on price. If they’re willing to consider seller financing, we can get creative on terms so the note is favorable to both parties. The goal is to make the property cash-flowing while achieving the owner’s price and creating a tax-beneficial revenue stream.
Listening to the needs of your seller will help you structure the transaction for success. For example, if they’re looking for consistent cash flow of a certain dollar amount, try to get the mortgage payment close to that number. If they want a lump sum in future years, consider structuring the terms with a balloon payment. By simply listening, you can win more deals.
No one says you must stay within the standards of a normal mortgage. We’ve structured several transactions with 0% interest-rate notes, 40-year terms, deferred payments, interest-only payments and many other unconventional strategies. The various rates, terms and payments that are possible with seller financing are broad.
Here are few more important items to discuss with your self-storage seller, though not all of them will apply to every situation. The owner should understand:
- Capital-gains taxes are only paid on principal received from payments.
- You can be flexible on the equity (down payment) you inject into the deal. This can be helpful when the seller needs to pay a broker, for example.
- If you fail to make the payments, they’re secured by the real estate property and can foreclose just like a bank does, even if they’re in second lien position.
- You’re becoming a team. There’s potential for continued equity in the property once they sell to you.
Benefits for Buyers
Now, let’s highlight the benefits of seller financing for you as a buyer. We always like a win-win scenario, and we’ve already discussed the fact that you can adjust terms such as down payment, interest rate, amortization length and others to ensure a favorable deal for both parties. Ultimately, this allows you to “cash flow” faster. You might even be able to negotiate a no-money-down offer, which would allow you to get into the property with limited cash out of pocket.
Another advantage is there typically won’t be any prepayment penalties with seller financing. Of course, you can always build them in if it makes the seller feel more secure in the deal.
Next, paying the seller with consistent monthly payments helps build trust, which could potentially turn them into a private investor for future deals. We find that once a seller has a positive experience with this type of financing, they love becoming the bank.
The Ultimate Win-Win
In the end, seller financing is just another valuable tool for investing in self-storage, but it may be the one that gives the owner confidence to close the deal. The market is changing, and with it comes ambiguity. Buyers must show sellers how they’re going to get the deal to the closing table and create certainty for them. This might not work in every scenario, however, when you’re able to implement seller financing, it’s creates a winning situation for buyers and sellers.
Note: This article is for informational purposes only. Consult a licensed CPA or attorney when attempting a deal with seller financing.
Jon Farling and Ian Horowitz are real estate investors with more than 10 years of experience. They quit their day jobs to grow their self-storage portfolios individually while also partnering in deals together through L4investing.com and EquityWarehouse.com. To reach them, call 614.951.9231.