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Holding a Note vs. Being a Landlord

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An Comparison Between Holding a Note vs. Being a Landlord

Pros and Cons:
So, you own a house, but you need to move, because your family has grown, or you have gotten a new job in another city, or you’re just ready for a new place. However, you’re having a tough time selling the house for what you want for it. You don’t really need the money out of it, at least not right away, but you don’t want to let it sit vacant after you move. A couple really loved the house, and they have credit that is all right but not great. They’ve saved up some for a down payment, but not enough to qualify for conventional financing, and with their iffy credit, the banks aren’t helping them. They ask you if you are willing to either rent the house to them or hold the note. This is an important decision, both for you and for them, so you’ll want to give this some thought. Here are some pros and cons that you need to consider.
Pros of Renting:
You maintain ownership of the house
You’ll move into your new home, and you’ll actually own two properties. You have an income stream coming from the house that will cover your mortgage payment, homeowner’s insurance, and taxes, with some profit coming your way as well. As long as this couple stays in your home, you have that stream. You know they love the house, so they are motivated to keep it up nicely.

Eviction is easier than foreclosure
The couple’s credit is iffy for a reason. Maybe they still have too many debts, or maybe they don’t pay their responsibilities on time. No matter what the issue is, remember that the banks wouldn’t take these people’s loan application. You need to protect yourself, and if they fall behind far enough on their rent, you can have renters out a lot more quickly and with a lot less legal hassle than you can foreclose on a borrower.

You control your maintenance costs
If your house has some structural issues lurking, or that backyard fence is about to fall down, a buyer can insist that you either fix the problem before closing or reduce the purchase price enough to give the buyer the money to remedy the problem. In a rent situation, most leases assign the tenant at least a fee to cover part of the maintenance requests. Instead of having to fix all the problems in your house at once, or eat their cost at closing, you can decide when to make those repairs.

Holding A Note on a Property:

The house stays in much better condition
Even if this couple really loves your house, they are going to take even better care of it if it is their own. You’re not having to worry about touching up paint, fixing a broken sprinkler system, or dealing with pipes bursting during a deep freeze. Those are your problems as the landlord, but not as the mortgage holder. The couple will likely do an even better job ensuring that those minor maintenance issues do not happen, or at least are not a surprise, if they are the owners.

You don’t lose your rental profits to maintenance expenses
In most leases, the tenant has to pay a fee for each maintenance request. However, that fee is usually not more than $100. If you have to put in a new furnace, you’re looking at a four-figure maintenance job. If the roof develops a leak, you have to pay the deductible for your homeowner’s insurance. If the couple owns that house now, these are their costs to bear. If your house is an older one, it’s easy to have a lot of your profits from the rental go to maintenance. You’d rather sit and just take the income from the mortgage and just allow the couple to bear the costs.

You don’t risk lost rent at the termination of a lease
If the couple lives in your house for a year but then decide that they love another house even more, you have the hassle of finding new tenants or listing the house for sale again. Every month that the house sits vacant is lost income for you. There is much less likelihood of having to foreclose on the couple than there is that you will lose them as tenants after a year. Holding the note for them makes the income stream more long-term for you.

If you are in this situation and looking for someone to lease your home from you or borrow the money from you, talk to one of our professionals at Amansad Financial. We have potential buyers or tenants looking for their new homes!

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Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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