Almost every page that ranks for owner financing was written for someone buying a house to live in. The advice assumes a first-time homebuyer who cannot qualify at a bank, and it stops at the front door. If you are buying a rental, the questions are different: you are taking over a note instead of a mortgage, you may be buying with tenants in place, and you, not a loan servicer, become the system of record for the interest you have to report. That gap is the reason this page exists.
Seller financing is straightforward once you see it as a private loan with four terms. The seller plays the bank. You agree on a down payment, sign a promissory note for the balance, pick a schedule that sets the monthly payment, and name a date the rest comes due. Get those four numbers right and the deal is clean. Get the interest rate or the balloon wrong and you have handed yourself a problem that surfaces years later. Here is how each piece works from the buyer's side.
The four terms that define the deal
A seller-financed purchase is not one document, it is two. The deed transfers ownership to you. The promissory note records what you owe and how you will pay it, and a deed of trust or mortgage secures that note against the property so the seller can foreclose if you stop paying. Read both. The deed says you own it. The note says how much of it you have actually paid for.
- Down payment. Owner financing on investment property usually runs a larger down payment than an owner-occupant deal, often 10 to 25 percent, because the seller is carrying the risk a bank would normally underwrite. Your down payment is the seller's cushion if you default, so a motivated seller wants more skin in the game, not less.
- Interest rate. The rate is negotiable, but it has a floor set by the IRS. More on that below. Expect a rate above what a conventional investment loan would carry, because you are paying for speed and flexibility, not for the cheapest money.
- Amortization schedule. The schedule that sizes your monthly payment is often a 20 or 30 year amortization even when the note is only good for a few years. A longer schedule means a lower payment, which helps your monthly cash flow, but it also means you pay down very little principal before the balloon arrives.
- Balloon and term. The note term is the date the whole remaining balance is due. With a 30 year amortization and a 5 year term, you make 60 payments sized for a 30 year loan, then owe a lump sum for everything left.
The interest rate has a legal floor
You and the seller can set almost any rate you both accept, with one guardrail. The IRS publishes the applicable federal rate every month, a minimum stated interest rate for private loans by term. If your note charges less than the AFR, the rules under IRC sections 483 and 1274 can treat part of your payments as interest anyway, recharacterizing principal you thought you were paying down. That is called imputed interest, and it changes both the seller's taxable income and your deductible interest.
The practical move is simple: state a rate at or above the published AFR for the note's term, in writing, in the note itself. A note that carries adequate stated interest sidesteps the imputed-interest rules entirely. The IRS explains the installment-sale mechanics behind this in Publication 537, which is written mainly for the seller but tells you which rules are in play.
A worked example
Say you buy a duplex for $340,000 on seller terms. You put 15 percent down, which is $51,000, and sign a note for $289,000 at 7 percent interest, amortized over 30 years with a 5 year balloon. The 30 year amortization sets your principal-and-interest payment at roughly $1,923 a month.
Five years of those payments total about $115,400. But because the payment is sized for a 30 year payoff, only about $17,000 of that goes to principal. After 60 payments you still owe roughly $272,000, and that is the balloon you have to cover on the term date. The seller financed your entry; the bank you refinance with, or the buyer you sell to, retires the note. The math is the point: a low monthly payment and a large balloon are the same coin.
That interest, about $98,000 over the five years in this example, is deductible on your Schedule E, line 13, the same as bank mortgage interest. The difference is that no servicer will mail you a Form 1098 telling you the number. You compute the interest-and-principal split yourself, payment by payment, for every year you hold the note.
The due-on-sale risk when there is an existing loan
The cleanest seller-financed deal is one where the seller owns the property free and clear. When the seller still has a mortgage, you are in riskier territory. Almost every conventional mortgage carries a due-on-sale clause that lets the lender demand the full balance the moment title changes hands. A seller who finances you on top of an unpaid bank loan is betting the lender never notices, and if it does, the loan they have left you on can be called.
Some deals try to work around this with a wrap-around note or a subject-to structure, where the seller's underlying loan stays in place. Those can function, but they raise the stakes, and the way a lender or a court treats them varies. Before you sign anything layered on top of an existing mortgage, get a title search and a written plan for that underlying loan.
What changes after you close
Buying with seller financing rarely happens on a vacant building. If you are buying a rental with tenants in place, the leases, deposits, and payment history transfer to you the same way they would in a bank-financed purchase, and the financing structure does not change your obligations as the new landlord. Your operating numbers, NOI and cash flow, are driven by the property, not the note. The note only sets your debt service.
Where it does change your life is the recordkeeping. Plan the balloon exit on day one, because qualifying for a refinance later means meeting a lender's seasoning and loan-type requirements you should understand before you commit. And from the first payment, you own the math that a servicer would normally do for you.
You are your own loan servicer now
On a bank loan, a servicer tracks your balance, splits each payment into interest and principal, and sends the 1098 your CPA needs. On a seller-financed note, that job is yours. Every month you have to know how much of your payment was deductible interest, how much paid down principal, and what balance remains so the balloon does not surprise you. This is exactly the gap tracking mortgage interest correctly is meant to close, and it is the gap that a back-of-envelope spreadsheet tends to drop.
This is the part I built rents.ai to handle. Its loan and amortization tools take the note terms you enter and split each recurring payment into deductible interest, principal paydown, and escrow, so the interest flows to Schedule E and the principal stays out of NOI where it belongs. The limitation worth saying plainly: it cannot pull your note from a bank feed, because there is no bank in the deal, so you enter the loan terms once yourself and it does the split from there. For a note with no servicer and no 1098, that becomes your system of record for the number you have to report.
These are general mechanics, not legal or tax advice. Default remedies, recording requirements, and how a state treats a contract for deed or a wrap-around note vary widely. Have a local real estate attorney review the note and security instrument before you sign, and run the tax treatment past your CPA.