You hear the angst on investing podcasts and in monthly real estate meetups across the country: “How are you finding cash flow? How are you finding deals that pencil out?” The strategies that worked just a few short months ago are just not panning out in an environment of high interest rates, high purchase prices, and little inventory.
What’s an investor to do?
Look to the baby boomers.
Why Boomers?
The largest transfer of wealth in history is underway right now as boomers sell their businesses, divest their investments, and get ready to retire. These are owners who likely bought their properties more than 10 years ago and are also likely to have a high equity position (or own their properties outright) and may be looking for an easy exit.
And although assuming this equity position just of boomers is a gross generalization, certainly, younger investors could also have high equity positions and low interest rates on their properties—it is more likely than not that older investors have more years in the market. This is also the reason that boomers are great candidates for partners in creative financing.
For example, Josh and Ali Lupo, who invest in the Albany area of New York and are in their early 30s, have been looking to work with this demographic for the last two years.
Said Ali in a recent conversation: “When we first started investing, it was like, let’s connect with people our own age that get it and are building their portfolio from the ground up. And while that camaraderie can be amazing, people your own age also have the same pain points that you do. They don’t have experience, and they don’t have money. But when we found people who had the opposite pain points as [we did], for instance [they had money, but no time], we found … our pain points were perfectly symbiotic.”
How to Find These Sellers
The Lupos have successfully used platforms like PropStream to help them target this demographic.
According to Ali: “We just did a large direct-mail campaign. It’s all public knowledge in terms of how long a person has owned a property and what the estimated equity they have in it is. You just kind of do the math. For instance, we put a minimum: A person has had to own the property at least 10 years, and they have to have at least 50% equity.”
The Lupos also use platforms like Craigslist and Facebook Marketplace to find sellers who might be interested in creative financing. “We look for apartments for rent,” says Ali. “[We look for] distressed property, photos that are a little outdated, or rent that’s a little below market. [Sometimes this can be] a tired landlord [who’s] had that property for a long time and would be happy to part ways for the right number. They don’t want the burden of managing anymore, but they’d be very happy to get steady cash flow from a seller finance opportunity.”
What’s in it for Them?
Clearly, as the investor, you stand to reap a lot of benefits from creative financing with a longtime landlord—likely a low down payment, lower-than-market-rate interest rates, and institutional knowledge on a property that’s been in one owner’s hands for a long period of time.
But what does the seller stand to gain by working with you on a creative finance deal rather than selling it outright? Here are four seller advantages straight from the mouths of the Lupos.
Reduced yearly tax obligation
According to Josh: “If these longtime owners were to go sell [their properties] on the market in full, [they’d] have a big tax obligation at the end of the year for all the capital gains on the sale of that property. But when you do seller financing, we’re making smaller monthly payments every month, and we’re spreading the tax obligation out over many years.”
Residual monthly income
Says Ali: “As a seller looking to retire, I may want that residual monthly income, but I don’t want to manage tenants and toilets. So every month, our sellers are getting a check from us, and we are managing the property for them. They don’t have to deal with any of the BS that comes with owning real estate, essentially, but they’re still getting that cash flow.”
Getting their asking price without fees
Josh says: “Let’s say they go sell that property… first, you’re talking 6% to 8% broker fees and transaction fees. Second, someone’s going to come along and try to fight them over their price because interest rates are so high right now. And third, someone’s probably going to say, ‘Oh, I need you to fix this, I need you to fix that.’ We’re going to save them those fees. We’re probably going to give them what they’re asking for, or at least pretty close to it, because we’re spreading out the purchase over several years versus one transaction.”
Collecting interest, aka free money
Perhaps best yet, says Josh, “[Our creative financing sellers are] actually going to get more in the end because for the life of the deal, [whichever way] you structure it, part of the payment that you’re giving the seller is interest.”
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.