So, you have built a successful rental portfolio over the past few years, but have you noticed your return has been dropping even though rents have been increasing! The reason is that expenses have been increasing even faster than rents! What to do? Think about transitioning your portfolio to Notes and double your returns!
Introduction
Rental landlords are seeing annual returns dropping due to expenses increasing faster than rents. Many landlords are working hard on finding solutions to restore their lost income. An option may be to transition your rental portfolio to seller financed notes. As a note holder, you will increase your income, while adding a financial cushion and reducing your day-to-day workload!
Rental Recap
Over the years, many wise investors have built a portfolio of rental homes, providing a solid income stream and annual return. Over time, the income stream has been dropping even though rents have been increasing. In 2018, landlords were getting a net income of around 8% annually. By 2025, the average return has dropped closer to 4%! The reason for the drop in returns is that expenses have increased significantly faster than rents.
This can be better seen in a real example. In the example below, we used a 3 bed/2 bath, 1348 sq ft rental home in Springfield, Missouri.
As you can see, the market value of the home has increased significantly over the period increasing the value of your investment. Looking more at monthly income, rent has increased a strong 25% while expenses have increased a staggering 80%. For your bottom line, your income has dropped $27 a month, and your cap rate dropped all the way to 4.4%! In the current market, this downward trend is expected to continue.
Solution – Seller Financed Note
While selling out is a solution, there are significant tax implications, and of course you would lose your monthly income stream!
Another option is to sell your rental properties with a Seller Finance Note. When selling your rental with a Seller Financed Note, you will minimize your tax impact, increase your monthly income stream, add a financial cushion and get your time back.
Using the same example from above, here is a real-world example of the difference between rentals and seller financed note.
The first difference you see is that you will now have the 10% down payment ($23K) in the bank. This is often called the financial cushion. Use the money to take care of bills, pay down other debt, or treat yourself to a once in a lifetime event!
The next difference is the monthly income. Your borrower will be paying a set monthly payment and interest (P&I) payment. Depending on the interest rate you choose, this amount may change slightly. In this case, your monthly payment will be slightly less than a rental.
The biggest difference is in the expense line… with a drop over 90%. When you sell with a seller finance note, there are almost no expenses! The $50 referenced above is for a servicer to handle all borrower payments and interactions.
The unwritten gain for you is that you will no longer be responsible for repairs and other landlord responsibilities! Since the borrower owns the house, they are now obligated to maintain the home and provide insurance.
The next change is the monthly income. In this example, you will receive an increase of $765 per month, a 90% increase over rentals. This increase in income has a direct improvement to your annual cap rate.
Summary
Market changes have put tremendous pressure on Landlords. Old models for doing business are not as profitable. Transitioning from rentals to seller financed notes can help Landlords double their current rental rate of return. In addition, seller financed notes will initially improve ROI, increase monthly cash flow, and get back the most important commodity… time!
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MEETING
Why not set up a meeting with a Peak Notes specialist to discuss transitioning your rental portfolio to Notes and double your rate of return! Meetings are brief, cost nothing and can give you more insight into how you can maximize your investment potential!
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