Landlords

Many of yesterday’s paper millionaires are now unhappy Landlords with properties that are underwater and/or have negative cash flow. Should you find yourself in this situation, you may be wondering how to solve this problem without destroying your credit and reputation.

For an Landlord, paying out more in payments than he is making in rents is a bad deal. But, when a homeowner does the same thing, he does this because he’s buying basic shelter and enjoying the pride of ownership. Thus, someone who is buying a home will happily pay far more per month to own than they will to rent.

The savvy Landlord can use this to their benefit.

Suppose you approached some of your more reliable tenants and offered to sell them the house they are renting from you at market interest rates on a wrap around loan without any credit qualifying. As the Landlord, you already know who pays on time and who doesn’t, so you would only offer this deal to those with a history of on-time payment. The rental deposit you’ve already received could be used as the down payment, and monthly payments would only be on the first deed of trust. By doing this, the negative cash flow that you’d been carrying would now be transferred to the new homeowners.

With the basic premise down, let us now consider a few varations.

High Price, Zero Interest, Big Payments

If the house payments are higher than rents, to give the buyer an incentive to swap rents for payments, the house could be sold with a principle only wrap around loan that was at zero interest. Doing so, would allow you to sell the house for a high price while still keeping the payments low enough for the buyer to afford them. Each payment would be building equity very quickly for the buyer, however, so at some point in the future, the buyer would have more equity than the seller.

To overcome this, you would need to anticipate when this was going to happen, and require the buyer to obtain new financing in order to pay off the underlying loan completely. Alternatively, you could simple deed the property to the buyer, who would continue to make the loan payments, which would now include the interest rate that the seller was paying.

High Price, Low Interest Rate, Low Payments, Buy Back Option

Should significant equity above high loan payments exist, the seller could sell at a price high enough to preserve the equity, but offer low interest and low payments. If this were to include a reverse amortizing loan, the net effect would be that some of the equity would convey back to the seller.

For buyers who intend to remain in the property for a longer period, a second approach might be for the seller to share in future equity growth by retaining a buy back option when the house was sold.

For example, if the house had $50,000 of retail market equity when the sale took place, the seller would have the option of sharing in all equity at any time in the future simply by paying the buyer 1/2 of all principle payments paid in over the period leading up to the date that the seller bought back in. Ordinarily, this would be the date that they buyer either refinanced the house, or sold it.

In either case above, the funds used to buy back in would be obtained out of the sale or loan proceeds, which would have been used to pay off the seller’s loan.