Financing and partnerships
How to Structure the Perfect Seller Financed Apartment Deal
The perfect creative finance deal is the least creative path to day one cash flow. Here's the 38-unit Moses Lake structure that paid me $400,000 on zero down.
If you're struggling to find a multifamily deal, struggling to find the financing, or trying to buy larger deals than your cash allows but you can't find seller finance deals for less than 50% down: you may be going at this the wrong way.
Related reading: 4 Seller Financing Pitches That Actually Get Offers Accepted
I'm Christian, your channel host, and I want to walk you through how I actually play the seller finance game: how to find the deals, and how to structure the perfect one.
Let me drop the most important thing right on the front end.
The perfect creative finance deal is the least creative way to get to day one cash flow while answering the two underwriting questions I answer on every single deal: how do I own it, and how do I never lose it?
Related reading: Deal, Debt, Equity: The Creative Multifamily Model I Use to Buy
Which sounds an awful lot like buy and hold. That's the point. That's the strategy you want.
If you can acquire the property (with or without money) and hold it indefinitely, on a deal that cash flows day one, what you've done is increase your income for the rest of your life. Possibly the rest of your children's and their children's lives, depending on how long you can convince them all to hold the darn building.
Rule one: day one cash flow
If you want to increase your income every single time you close a deal, the deal needs to make positive income every single time you close a transaction.
The equation is simple. Total income minus all expenses. If there's money left over at the end of the month, that's positive cash flow. You want to see a positive return on investment.
A lot of people have very specific metrics around this. I don't actually care about hitting somebody's threshold number. What I care about is the box.
The box: four numbers that define every deal
There's an actual square you create with your day one numbers and your future numbers.
Most seller finance notes are going to have a balloon. Even if you have an amortized schedule (usually 5, 10, or 15 years) the note is going to come due. So we do two pieces of math on each axis.
On the top of the box: what is the cash flow at the beginning of this transaction, and what is the cash flow projected to be, conservatively, at the end?
On the bottom of the box: what is it worth today, and what will it be worth in the future? Deals have a specific cap rate, a specific valuation based on how they're performing in your market. Find what it's worth based on its current net operating income, then figure out conservatively where that deal lands later.
Now you've mapped your actual opportunity. Today's cash flow, future cash flow, today's value, future value.
Before we go any further inside that box, we first select a debt product. Because with seller financing, the perfect deal is one where you've answered everything the seller wants and everything you need.
The 38 units in Moses Lake: one of my first deals
Here's the example. Thirty-eight units in Moses Lake, Washington. One of the first deals I ever did. I'd never raised capital before. I'd never done seller financing before. This was the first time.
The seller wanted $10,000 a month. The property made $7,000 a month.
So we couldn't cover our operating bills, pay the mortgage, and cash flow. We couldn't even come close. But I need day one cash flow and a plan to both buy and never lose the property, which means I need to maintain cash flow in perpetuity.
The good news: the owner was willing to do a long-term note at 4%. Great interest rate. They just needed a payment we couldn't afford.
So what's the simplest way to get there?
We took a whiteboard and wrote out both sides.
Their fixed points: the things they must have:
- $10,000 a month
- $300,000 down
- $2 million purchase price
My fixed points:
- Day one cash flow
- Long-term, cash-flowing, fixed-rate debt in perpetuity
How can you have both when they want a higher payment than the property's cash flow?
The simplest answer is the right answer. No mortgage payments for the first six months while we increase the income on the property.
After we fix all the problems (including their collections issue) we can easily pay a $10,000 mortgage. And at 4% interest, we actually pay that loan down very, very quickly. It's called a custom amortization. We simply add principal payments until the payment gets to $10,000 a month.
That's not all that creative. The pitch is basically: the deal will cash flow a lot, it just doesn't today, and I need it to cash flow day one. So we'll give you everything you want. We'll give you your price. We'll give you your down payment. We'll give you your monthly payments. You just have to wait six months for the payments part to kick in.
They get everything they wanted. I get everything I wanted. We closed that deal, and we've done many others with similar structures.
For context: that deal had been on market for 12 years. They had been waiting and waiting and waiting. I gave them two of the three things they wanted immediately, and a six-month timeline on the last piece they'd been waiting years for. They were able to retire on this deal. Home run for them, home run for me.
Later we did a cash-out refinance and pulled a million dollars of cash out of that property from one transaction. And remember, I've done around 30 transactions.
That's how you negotiate a seller finance deal. It is not about putting together the lowest interest rate, or the perfect deal, or chasing the lowest down payment. It's understanding what they need and what you need to close.
My argument to you: get long-term, cash-flowing, fixed-rate debt on every single deal, with as long a term as you can possibly negotiate.
Where the $300,000 came from
I left a mystery in there. I didn't have $300,000. Fifteen percent down is relatively low, but it's still a big down payment. So where did the money come from?
Because we'd already negotiated the deal, already set up our custom debt product, and already had a business plan for getting from A to B, we now had a package we could present to other people who were also interested in making money in real estate.
I had never raised capital before. The $300,000 came from three people I had never met before in my life.
I talked to maybe five people who were in real estate. One of them was a broker who worked down the street from me. He had small multifamily clients: duplexes, triplexes, fourplexes, residential multifamily. So I asked him a simple question: do you have any investors who are trying to buy bigger deals but don't have any opportunities?
He doesn't represent those properties, so I'm not competing with him. But if he has people who want to deploy money there, maybe they'd be willing to partner with me.
He gave me four names. Three of them wanted to put in $100,000.
I'm not super good at math, but if you're trying to raise $300,000 and you have three people with $100,000 each in 24 hours: we did an entire capital raise in my 20s with no experience. No credit checks. We simply did the deal, found the debt, and there was a little bit of money left over after the debt was set.
We put together the equity, and at the refinance I bought them all out of the property for $600,000. They all doubled their money. There was $400,000 left over. I got paid $400,000 on a $0 out-of-pocket investment.
The seller walked away with everything they ever dreamed of. I got income and cash. Every investor in the deal doubled their money.
And it was in no way a home run deal. It was a home run structure.
Fitting the equity into the box
Back to that square.
Our day one cash flow was enough to pay our soon-to-be mortgage once we got the rents up, but we were trying to make a $10,000 a month payment. So while future cash flow is much higher, we're eating a lot of it with principal paydown.
Which means the cash flow side of the box looked like this: day one cash flow lower than we need, but with lower payments to compensate. Future cash flow more than enough to pay ourselves and pay the mortgage, but not enough to raise additional debt or make distributions to investors.
So how do we compensate them? Look at the other half of the box.
We bought 38 units for $2 million. In that Washington market at the time, apartments of similar quality, when stable, usually appraised at about $100,000 per door, or $3.8 million. We increased the project over time and eventually got an appraisal for a little over $4 million. We doubled the value.
So: not enough cash flow to share at the top of the box. Day one value about where we bought it. Future value with a lot of upside. That tells you exactly which quadrant to incentivize.
We told investors: we will double your money in five years or less. And what did we actually end up doing? Just after year one, we bought everyone out for double their money. Fantastic return, but we tailored it to the deal.
The deal will tell you where the money is coming from. We negotiate the deal. Then the debt, and the debt told me where we'd land on cash flow. Since that didn't answer where the money was coming from, we moved down to the equity, saw a big increase in value and a great price, and incentivized investors there.
You will always fall somewhere within that box. And if it doesn't work on the cash flow side or the future equity side, guess what? You don't have a deal yet. Get back to negotiating.
Key takeaways
- The perfect creative finance deal is the least creative path to day one cash flow. Ask two questions: how do I own it, and how do I never lose it?
- Write both sides on a whiteboard. Their fixed points and yours. Then find the simplest structure that satisfies both.
- On Moses Lake, the answer was six months of no mortgage payments plus a custom amortization at 4%: the seller got price, down payment, and their $10,000 monthly payment, just delayed.
- Negotiate the deal and the debt first. What's left over tells you what you need from equity.
- Raise capital with a package, not a pitch. I got $300,000 from three strangers in 24 hours because the deal and the debt were already structured.
- Incentivize investors in whichever quadrant of the box has room. Low cash flow, big future value means pay them on the equity side.
- If neither the cash flow nor the future equity works, you don't have a deal yet.
The full walkthrough, including the whiteboard version of the box, is in the video at the top of this post.
If you want to go deeper, my mentorship and a free multifamily training are both at multifamilystrategy.com. And the free Skool community is where thousands of people are structuring deals exactly like this one: there's a free calculator in there too. Link's below. See you on the next episode.
Read the episode transcript
0:00 If you're [music] struggling to find a 0:02 multif family deal, if you're struggling 0:04 on finding the financing, if you want to 0:05 buy larger deals in the amount of money 0:07 you have, but you're not finding seller 0:09 finance deals for [music] less than 50% 0:11 down, you may be going at this the wrong 0:14 way. I'm going to share some practical 0:15 tips to find deals and how to structure 0:18 the perfect seller finance deal. Welcome 0:21 back to the channel. My name is 0:22 Christian. I'm your channel host. If you 0:24 haven't yet, like and subscribe. If you 0:26 want to join our free school community, 0:27 it's completely free. There's a link 0:28 below. There are thousands of people 0:30 there who are structuring deals exactly 0:31 like this. So, the first thing you can 0:33 do if you want to find deals is go ahead 0:34 and join the free school community. 0:36 After that, let's get rolling on how we 0:38 play the seller finance game. First and 0:42 most important thing, I'm going to drop 0:43 this right on the front end. The perfect 0:46 creative finance deal is the least 0:49 creative way to get to day one cash flow 0:52 and answer the two underwriting 0:53 questions that we answer for every 0:55 single deal. How do I own it? And how do 0:57 I never lose it? which sounds an awful 0:59 lot like buy and hold. Why? Because 1:01 that's the strategy you want to go for. 1:02 Now, if you can both acquire the 1:04 property with or without money, and you 1:07 can hold it indefinitely, what you have 1:09 done on a deal that cash flows day one 1:11 is you've increased your income for the 1:13 rest of your life, possibly the rest of 1:16 your children and their children's life, 1:17 depending on how long you can convince 1:18 them all to hold the darn building. So, 1:20 what are the rules of the game? First, 1:22 as I already mentioned, day one cash 1:24 flow. If you want to increase your 1:25 income every single time you close a 1:27 deal, it needs to make positive income 1:30 every single time you close a 1:31 transaction. Very simple equation for 1:33 this income, total income minus all 1:36 expenses. If you have money left over at 1:39 the end of the month, that is positive 1:42 cash flow. You want to see a positive 1:44 return on investment. Now, there's a lot 1:45 of people have specific metrics around 1:47 these. I don't actually care. See, we 1:50 actually fall into a square here. 1:52 There's an actual box that you create 1:54 with your day one numbers and your 1:56 future numbers. Most seller finance 1:58 notes are going to have a balloon. So 2:00 even if you have an amortized schedule, 2:02 usually 5, 10, 15 years, the note is 2:06 going to come due. So we do two pieces 2:08 of math. What is the cash flow at the 2:10 beginning of this transaction? What is 2:12 the cash flow projected to be 2:14 conservatively at the end? Top of our 2:16 box. On the bottom of the box, what is 2:19 it worth today? Deals have a specific 2:22 cap rate, a specific valuation based on 2:24 how they are performing in your market. 2:27 Simply find what is it worth based on 2:29 its current performance, its net 2:30 operating income today, and where do we 2:33 anticipate in the future conservatively 2:36 that deal will be. Now, we've mapped 2:39 out, okay, here is our actual 2:41 opportunity. Here's today's cash flow. 2:43 Here's future cash flow. Here's today's 2:47 value. Here's the future value. Now, 2:50 before we move on to the final step of 2:52 mapping out inside that box, we're first 2:54 going to select a debt product. Now, for 2:57 seller financing, the perfect seller 2:59 finance deal. You have answered 3:01 everything that the seller wants and 3:02 everything that you need. I'm going to 3:04 use an example. This is one of the first 3:05 deals I ever did. 38 units, Moses Lake, 3:08 Washington. I'd never raised capital 3:10 before. I'd never done seller finance 3:11 before. This is the first time I did it. 3:13 The seller wanted $10,000 a month. The 3:16 property made $7,000 a month. So, we 3:19 couldn't even cover our operating bills 3:21 and pay the mortgage and cash flow. We 3:23 couldn't even come close, but I need day 3:26 one cash flow and a plan to both buy and 3:30 never lose the property, which means I 3:32 need to maintain cash flow in 3:33 perpetuity. For the owner, they're 3:35 willing to do a long-term note. They're 3:37 willing to do 4%. 3:39 So, we had great interest rate, but they 3:40 needed this high high payment that we 3:42 couldn't afford. What is the simplest 3:45 way to get there? Well, the maximum that 3:47 we were able to do was 15% down on a $2 3:49 million purchase. I'll get to how we 3:51 raised that on the back end of this 3:52 video. For the debt product, all we did 3:54 was take a whiteboard and we wrote out 3:55 both sides. Seller needs $10,000 a 3:58 month, $300,000 down, $2 million 4:01 purchase price. These are the fixed 4:02 points that they must have on my end. I 4:05 need to have day one cash flow, 4:08 long-term cash flowing fixed rate debt 4:10 in perpetuity on the loan. How can you 4:13 have both things if they want a higher 4:15 payment than the cash flow and I need 4:17 cash flow? Well, the simplest answer is 4:20 the right answer. There are no mortgage 4:22 payments for the first 6 months while we 4:24 increase the income on the property. And 4:26 after we fix all the problems with the 4:28 property, we fix their collections 4:29 issue. Now, we can easily pay a $10,000 4:33 mortgage. And at 4% interest, we 4:35 actually pay down that loan very, very 4:37 quickly. It's called a custom 4:38 amortization. We simply just add 4:41 principal payments till they get to 4:42 $10,000 a month. That's not all that 4:45 creative. You're like, "Hey, the deal 4:47 will cash flow a lot. It doesn't today. 4:49 I need it to cash flow day one. We will 4:51 give you everything you want. We'll give 4:52 you your price. We'll give you your down 4:53 payment. We'll give you your monthly 4:54 payments. You just have to wait 6 months 4:56 for the payments part to kick in. You 4:59 get everything that you wanted. I get 5:01 everything I wanted. We went ahead and 5:03 closed that deal." We did many other 5:05 deals with similar structures, but that 5:07 is the key to creative finance. That's 5:08 the perfect creative deal. Do I have day 5:10 one cash flow? Can I keep it forever? 5:12 Have I increased my income for life? And 5:13 has the seller walked away with 5:15 literally everything that they ever 5:17 wanted out of their deal? For context, 5:19 this deal was on market for 12 years. 5:22 They have been waiting and waiting and 5:23 waiting. I gave them two of the three 5:25 things they wanted immediately and a 5:27 six-month timeline to kick in for the 5:29 last piece they've been waiting years 5:30 and years and years for. They were able 5:32 to retire on this deal. Home run for 5:35 them. Home run for me. Later on, we 5:38 actually did a cash out refi. We have 5:39 pulled 1 million cash out of this 5:42 property from one transaction. And then 5:45 remember, I've done like 30 5:47 transactions. 5:48 This is how you negotiate a seller 5:50 finance deal. It is not about putting 5:52 together the lowest interest rate, the 5:54 perfect deal, chasing the low down. It's 5:56 understanding what do they need and what 5:59 do you need to close a deal. And my 6:01 argument to you, just get long-term cash 6:03 flowing fixed rate debt on every single 6:05 deal. and as long of a term as you can 6:07 possibly negotiate. I realized I still 6:09 left a mystery in there. I didn't have 6:11 $300,000. Where did the $300,000 come 6:14 from? That's still a big down payment. 6:15 Now, 15% down is relatively low down, 6:18 but where does the money come from? 6:20 Well, because we'd already negotiated 6:22 the deal and we'd already set up our 6:24 custom debt product and we had a 6:26 business plan from how we're going to 6:27 get from A to B, we now have a package 6:29 that we can present to other people who 6:31 are interested in also making money in 6:33 real estate. The 300,000 since I had 6:35 never raised capital before came from 6:37 three people I had never met before in 6:39 my life. I talked to maybe five people 6:41 who were in real estate. One of them was 6:43 a broker who worked down the street from 6:45 me. He had small multif family clients. 6:47 We're talking duplexes, triplexes, 6:49 forplexes, residential multif family. I 6:52 simply asked, "Do you have any investors 6:54 who are trying to buy bigger deals but 6:56 don't have any opportunities?" Since he 6:58 doesn't represent those properties, I'm 6:59 not competing with them. But if he has 7:01 people who want to deploy money there, 7:03 maybe they would be willing to partner 7:05 with me. Turns out he gave me four 7:07 names. Three of them wanted to put in 7:09 $100,000. I'm not super good at math, 7:11 but if you're trying to raise 300,000 7:13 and you have three people who have 7:14 $100,000 in 24 hours, we did an entire 7:18 capital raise in my 20s with no 7:20 experience. There's no credit checks. We 7:23 simply did the deal, found the debt, 7:26 there was a little bit of money left 7:27 over after the debt. We put together the 7:29 equity at the refinance. I bought them 7:31 all out of the property for $600,000. 7:34 So, they all doubled their money. There 7:36 was $400 left over. I got paid $400,000 7:40 on a 0 investment out of pocket. The 7:43 seller walked away with everything they 7:45 ever dreamed of. I got income and cash 7:48 and all of the investors in the deal 7:50 doubled their money. And it was in no 7:52 way a home run deal. It was a home run 7:55 structure. And that is the perfect 7:57 seller finance deal. Now, let's get back 7:59 to that square I mentioned. So, we have 8:01 our day one cash flow, which is enough 8:03 to pay our soontobe mortgage. We get the 8:06 rents up, but we're trying to make a 8:08 $10,000 a month payment. So, while the 8:10 future cash flow is going to be much 8:12 higher, we are eating a lot of it in 8:14 this deal with principal payown. So, 8:16 when we're raising capital for people, 8:17 we need to fit the final money, the 8:19 equity into the box of day one cash 8:21 flow, future cash flow, day one equity, 8:23 future equity. 8:24 Day one cash flow lower than we need, 8:26 but we have lower payments to 8:28 compensate. Future cash flow more than 8:30 enough to pay ourselves, pay the 8:32 mortgage, not enough to raise additional 8:34 debt or make distributions out of cash 8:36 flow to investors. So, how do we 8:38 compensate? Well, we bought it for $2 8:40 million. This is 38 units in a market of 8:44 Washington state where at the time 8:46 apartments that are similar quality when 8:48 they are stable usually appraise at 8:51 about 100,000 per door or 3.8 8 million. 8:55 So what do we do? We increased the 8:56 project over time. We eventually did get 8:58 an appraisal for a little over $4 9:00 million, which means we doubled the 9:02 value. So the cash flow side of the 9:04 equation, too low at the beginning to 9:06 share and we want to keep the cash flow 9:08 on the high end. So there's not enough 9:09 cash flow the top end of the box. Our 9:12 day one value is about where we bought 9:14 it. Our future value, there's a lot of 9:16 upside, which means we incentivized on 9:18 this quadrant of our box. We said, "Hey, 9:21 we will double your money in five years 9:24 or less." And guess what we ended up 9:25 doing? Just after year one, we bought 9:27 everyone out for double their money. 9:29 Fantastic return, but we tailored it to 9:32 the deal. The deal will tell you where 9:34 the money is coming from. We negotiate 9:36 the deal. Then the debt, the debt told 9:38 me where we're going to be on the cash 9:40 flow. Since that didn't answer where the 9:42 money's coming from, we moved down to 9:43 the equity and we went, "Hey, we have a 9:46 big increase of value. We're actually 9:47 getting a great price. Let's incentivize 9:49 [music] the investors there. You will 9:51 always fall within this box. And if it 9:53 doesn't work on the cash flow side or 9:54 the future equity, guess what? You don't 9:56 have a deal yet. Get back to 9:58 negotiating. Hope this was helpful. If 9:59 you have any questions, let me know 10:00 below in the comments. We talk creative 10:02 finance all the time. I'm going to have 10:03 a whole lot more in this series, but 10:05 today's video focuses specifically on 10:08 seller [music] financing, how to 10:10 negotiate. See you on the next episode. 10:13 [music]
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