If you’re looking for a way to earn some extra cash in the real estate market, land financing may be your best pick. It essentially presents a golden opportunity in a niche space to generate residual income by cash flowing raw land.
What is Land Financing?
Acquiring lending for raw or vacant land from conventional banks can be a challenge. Financial institutions deem land loans riskier than conventional mortgage loans. Especially when the land is structure-deprived. The lack of financing presents an opportunity for savvy land investors who can serve as the bank on their own land deals.
Many land deals fall into ranges below the loan threshold of banks ($5,000-$25,000), therefore preventing your average buyer from realizing their land-acquisition dreams using conventional financing.
What is a Captured Market?
What does this mean for you, the property owner? You have a captured market. The one full of potential buyers who don’t want to fuss with the banks or can’t because their credit is way south of 600. But these folks are dying to purchase some land. Either to build on it one day, commence organic farming or establish a nature preserve. Who knows? But all you need to know is that they want to buy land and are willing to pay higher interest rates to do so.
It’s called owner financing and it opens up a myriad of money earning opportunities for you, the owner. According to Investopedia, owner or seller financing offers extra income to the owner via interest and allows one to expeditiously move a property in a buyer’s market. Furthermore, this type of financing benefits the seller by creating monthly cash flow providing a greater return than fixed-income investments reports Investopedia.
How to be Effective in Seller Financing?
Steve Gillman wrote on The Penny Hoarder that the key to seller financing is to make it easy for the customer. In his first owner financing foray, he explained that the buyers felt the property was overpriced and the interest was too high.
“Then they closed the deal anyhow, at full price. Why? They liked the parcel and could afford the $250 down payment and $100 monthly payments,” he wrote. “In other words, they probably didn’t have a lot of other options. Now the land might be worth $20,000, so I imagine they’re happy with their investment.” In essence, the owner should just be advertising the total price of the land and the monthly payment. Keep it simple.
Interest rates attached to owner financing are usually higher. Obviously, this is good for the seller. Rates could be between 7 percent and 11 percent or above. To put it into perspective, the average rate for a 30-year fixed rate mortgage is currently 4.39 percent. Gillman charged 11 percent on a property and “By the time the balance was paid in full a few years later, my $3,600 investment had made me more than $2,100 in capital gains and interest, even after the minor transaction costs.”
As the dictator of terms or person offering the financing, you do have the freedom to be creative, i.e., being able to change the length of financing or a large payment on the back end of the loan.
“Remember, I am the bank. I can stretch out the term of the amortization…as long as I’m willing to allow,” wrote Seth Williams on REtipster.com. “At the end of the day, whatever it takes for me to sell a property and make money (creating a win-win for both parties involved), I do it!”
The Opportunity of Land Financing Long-Term
Gillman suggests buying land cheap, offering it north of the market value and stipulating a modest down payment with low payments and high-interest rate.
He also wrote that the owner has to be patient. “You have to be willing to hold land for a while because you never know how long it will take to find the right buyer. Fortunately, property taxes (your only expense) are minimal on raw land.”
Being able to buy and sell land offers you an opportunity to make money in a niche market that doesn’t have the amount of competition that’s in the conventional real estate space. Raw land is fairly easy to buy below value and can be sold above the market value when financing is offered. If you combine that with the ability to earn interest and generate residual income, land financing can be a high yield investment that produces returns for years to come.