Hello my friends and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question comes from Alan and he says, hi Marco. I have seen on the MLS a house for sale with owner financing. I know houses on the MLS are listed at or near their max value and everyone says you make your money on the buy. My question is, would you pay full price for a house with owner financing if it meets the 1% rule and still makes some cash flow? Also, do you have to tell the bank about this owner financing deal when trying to buy another property using conventional financing? Thanks Allan.

Thanks for your questions Allan.





So essentially your main question here is about buying an owner finance property. So let's break this down. So first of all, to your first comment, you don't always make money on the buy.

I know a lot of people say that, but that comment is especially true for someone who is more of an active real estate investor, or let's just call them a flipper or someone who buys fixes and then keeps the property because you obviously want to get the best price possible on the front end so you can budget for renovations and contingencies and hopefully some equity in there, which is your forced equity, meaning the profit or the value that you build into the property. If you can find a nice rent ready property or a turnkey rental or a property that is essentially a performing asset, meaning it's leased and generating income, and you can get at a discount for whatever reason, great. Uh, and that's just a better deal because you're not only getting the property you want with positive cash flow, but you're getting some equity as a kicker on the front end, but you don't always make your money on the buy.

In fact, if you look at most investments in prudent markets, you will find that the appreciation and equity growth in that property over time is really where you have your greatest gains. If you get that on the front end as a kicker, that's fantastic. Call that icing on the cake or a bonus, but your wealth has created over time as the equity grows in your property. I could do an episode on that alone, but I just wanted to comment on that while you brought it up. So your question about would you pay full price for house with owner financing? My answer is yes. It depends what I mean by that. Is the owner financing a first or a second? Assuming that it's a first, the question is how much of a first, is it a hundred percent financing, 80% financing, like a conventional mortgage where maybe they're only offering, let's say 50 or 60% owner financing and then you have to come up with the rest and that's, you know, a sizable down payment compared to your other options, like getting conventional financing or some other mortgage financing that allows you to finance up to 80% but let's just assume it's a first.

So if the seller is willing to finance 80% or maybe even 90 or 100% of it with no down payment, fantastic. As long as you've got positive cash flow or ideally close to positive cash flow. I mean, if you're getting a hundred percent financing, meaning full leverage, no down payment, um, and it's a break even and there's no deferred maintenance, well, what is your return on zero down when you have positive cash flow? Well, the answer to that question is your rate of return is infinite. You put nothing down. So it's not that it's 1% or 5% or 10% or 100% it's infinite and so that is the ultimate leverage. However, just be careful because with a hundred percent financing, if you're buying at full price, you have you know no equity there. If you are forced to sell or you need to sell, it is what it is. It's just a house with no equity generating income.

But if you're keeping it for a longer period of time, let's say three, five, seven, 10 years or more, that equity will come in time. Now if you are actually finding a property that is close to 1% meaning it rents for 1% of the purchase ...