Converting a rental to seller financing works for one reason: you stop paying the expenses. On an $1,800 rent house, roughly half of that gross gets eaten over time by roofs, HVAC, plumbers and turnover, leaving about $900 before debt service. Sell the same house with owner financing and the note payment runs about $1,900 to $2,000 — with none of those costs coming out of your side.
Eddie Speed, founder of Colonial Funding Group, has bought roughly 50,000 seller-financed notes since 1980. His argument is not that you sell above market. He is emphatic that you don’t. It’s that the expense line disappears, and that the note only pays off in full if it’s built to mortgage-banker documentation and underwriting standards so it trades cleanly on the secondary market.
Below: the actual math, which properties and buyers qualify, down payment thresholds, why inflating price costs you twice, and the six factors that set what a note is worth when you go to sell it.
Key takeaways
- An $1,800 rent house nets roughly $900 before debt service after typical 50% expense load; the same house owner-financed carries roughly a $1,900–$2,000 payment with no landlord expenses — Speed models net income rising about 2.5x, but says it must be tested property by property.
- The strategy only works selling to an owner-occupant. Sell to another landlord and you’ve just recreated the expense problem on their side; it also doesn’t work on fourplexes or multi-unit assets.
- Expect 10% down from a documented-income buyer with a track record of paying creditors, and typically 20% from an ITIN buyer, because that is what the non-QM market requires.
- Do not sell above market value. Speed cites Dodd-Frank compliance and the fact that an overpriced house gives the borrower a reason to stop paying. The legitimate premium is a non-QM interest rate, not an inflated price.
- Six things drive note value: the borrower, the collateral, the buyer’s equity, the loan terms, the pay history, and the paperwork. Repapering a bad note later is hard and requires borrower cooperation.
From the Real Estate Pros Show
This article draws on an interview with Eddie Speed of Colonial Funding Group on the Real Estate Pros Show, hosted by Dylan Silver.
Why Rentals Stopped Working: Expenses Outran Rents
The post-2020 consensus that rental property is the natural inflation hedge does not match what happened the last time inflation ran hot. Speed started in the business in 1980, when interest rates were 18%, calling on landlords, home builders and realtors. What he found was landlords who were unhappy — specifically about their rentals.
The mechanism is simple. Rents did not pace with expenses. By his estimate, expenses climbed about two and a half times more than rents did. Take the same rent house through that cycle and the math that used to work stops working, without anything about the house changing.
That is the pattern he says repeated after 2020. Investors who bought rentals in 2015 got cash flow that penciled easily, then got appreciation on top of it during an abnormal surge. Neither condition is present now. Speed orders property values daily on notes across Houston, San Antonio, Dallas, Tyler and Abilene, and describes the current picture as flat to slightly down against a year ago.
There are roughly 18 million rent houses in the country and, as he puts it, not near as many happy landlords as there used to be. The pain is finally translating into action. Speed says he’d been making this argument for a couple of years with limited traction, and only in the last few months has seen real market adoption — because owners have concluded inflation is not reversing on its own.
None of that means every rental should be converted. It means a meaningful share of single-family rentals are underperforming for structural reasons, and the owner is not stuck with them.
The Rent vs. Note Math on an $1,800 House
Run it on the national average. The average single-family rent in the U.S. is about $1,800 a month. Of that $1,800, statistics say the landlord keeps roughly half — before paying the bank.
Speed is careful about how that 50% shows up. It is not a clean monthly deduction. Fractional CFO firms serving hundreds of single-family landlords told him the same thing he’d observed: the expense doesn’t hit evenly, it hits at the end of the year or the end of the eighteenth month, when the air conditioner goes, when the roof goes, when the plumber comes, when a tenant moves out. Averaged across the hold, it lands near half.
So the rental produces about $900 before debt service.
The same house sold with owner financing carries a payment of roughly $1,900 to $2,000. Call it $2,000. The landlord expense line is gone — the owner-occupant carries the roof, the HVAC and the plumber. That’s the swap.
Speed’s summary number: net income can pop up about two and a half times. Two things to be honest about. First, that’s his model, and he says plainly it has to be tested property by property. His own framing is that if it doesn’t make sense on a given house, don’t do it — some properties model well and the next one doesn’t.
Second, this is not an argument that real estate doesn’t appreciate over ten years. His point is about sequence: if you’re collecting substantially more net income starting now, appreciation would never pace with cash you’ve already banked. Would you rather have the dollar today or wait a decade for it?
It’s not a loan-to-own mentality. It’s loan them the money so they can own. Loan-to-own is where you make a loan you don’t think somebody can pay back — that’s not good business in my opinion.
— Eddie Speed, Colonial Funding Group
Which Properties and Buyers Actually Qualify
There is a price band, and houses fall off both ends of it.
Too low and the neighborhood isn’t owner-occupied caliber. Too high and the math breaks differently — in an executive-price neighborhood, a non-QM buyer paying a higher interest rate doesn’t fit what that neighborhood delivers. The house needs to sit in a neighborhood where owner-occupancy is the norm.
The harder filter is who buys it. This only works with an owner-occupant. The entire reason the numbers improve is that you shed the expense load. Sell to another landlord and you have to build a model where that landlord can still fund a roof and a turnover — you’ve moved the problem, not solved it. For the same reason, Speed says it doesn’t work on a fourplex or other multi-unit assets.
On the demand side, the buyer pool has grown for reasons that have nothing to do with real estate investing. The Mortgage Bankers Association’s Mortgage Credit Availability Index sat around 185 in 2019. It’s around 100 today. In practical terms, roughly 40% of the buyers who could have gotten a conventional mortgage in 2019 cannot get one now.
ITIN buyers are a specific slice of that. They used to be able to get FHA financing. They can’t anymore. These are people legally present but outside the conventional system, and they represent real, documented demand.
These buyers are largely not shopping the MLS. That changes who you need on the transaction — you’re looking for someone who can reach that community directly, not someone waiting on inbound showings.
Down Payments and Underwriting the Buyer
The range is 10% to 20% down.
Ten percent applies to a buyer who can prove income and shows a track record of paying creditors back — not exceptional credit, but a documented, verifiable file. Twenty percent is typical for an ITIN buyer, and Speed frames that as the market speaking rather than a preference: go get a non-QM loan on an ITIN borrower and 20% down is the standard.
His underwriting box is deliberately unremarkable. Take what’s normal and customary in the non-QM world today and his criteria look very similar. That is the point. The standard already exists.
Where he pushes back hardest is on the phrase “I had it underwritten by a third party.” His response: to whose standard? A residential mortgage loan originator underwrote it — fine, but underwrote it against what box? He compares it to saying you’re certified without saying who certified you.
He also draws a line between two mentalities. Loan-to-own is making a loan to someone you don’t believe can repay it, then collecting the house. Speed calls that bad business. The alternative is lending someone money so they can own. Underwrite well enough and delinquency and default become a fraction of what they’d otherwise be. Foreclosure is a backstop you hope never to use, not a business plan.
One operational trap: listing the house for 60 days, getting frustrated, and telling the agent to find a buyer by next Friday. The agent will find one. They’ll do it by lowering the standard, and you’ll own that decision for the life of the note.
Do Not Inflate the Price — It Costs You Twice
The single most common piece of seller-financing advice online is that you can sell above market because you’re carrying the paper. Speed refuses to teach it, for two reasons.
First, he says overselling the property is not compliant with Dodd-Frank. That’s his position, and pricing and disclosure obligations on owner-financed sales are worth reviewing with your own counsel before you structure anything.
Second — and this one is pure operator logic — an overpriced house is a reason the borrower stops paying later. The best seller-finance transaction is the one where the buyer thanks you for letting them own a home. A buyer who figures out they paid $30,000 over comps does not stay motivated through a hard year.
The legitimate premium is the interest rate. You are originating what functions as a non-QM loan, so you’re not making a Fannie Mae rate. The market says that risk prices higher, and it does. That is a real, defensible spread. An inflated sale price is not.
The cost of getting this wrong shows up twice. Speed described a customer who came to him that same day: the man oversold the property, took the note to the secondary market, and got clobbered on price. Speed’s private assessment — you did that to yourself.
His father’s line was that a horse is worth what the traffic will bear. In real estate, a property is worth what other properties sell for. Every appraiser, agent and mortgage banker in the country spends most of their energy establishing exactly that number. Sell at retail. Don’t sell above it.
What Makes a Note Sellable: The Six Value Drivers
Across 50,000 notes purchased, Speed says six characteristics account for everything that moved the price up or down:
- The borrower — credit, income documentation, payment history with other creditors.
- The collateral — the property itself and its value.
- The equity — down payment, plus paydown and appreciation over time.
- The terms — interest rate and length of the loan.
- The pay history — how the loan has actually performed.
- The paperwork.
On paperwork, his test is the Fannie Mae comparison. Pull ten Fannie Mae loans and the underwriting, disclosures and legal documents look like twin sisters — homogenous, disciplined, compliant. That uniformity is why institutional buyers can price them fast. His line: homemade does not increase the value of a seller-finance transaction. Documents drawn by a law firm, correct disclosures, compliant underwriting.
About 100,000 seller-finance transactions are created nationwide each year, and Speed says a meaningful share of them he would not buy — the buyer isn’t strong enough, the property isn’t the right standard, the equity or credit is off, or the paperwork is homemade. Nobody had bad intent. They just lacked disciplines.
Then the liquidity mechanic. In a rental conversion, the note is bought virtually simultaneously with creation, and you don’t have to sell all of it. Sell $1,400 of a $2,000 payment and keep $600. Or keep $500 of the $2,000. The cash pays off the underlying debt and funds the next deal while you retain monthly income. That’s how you avoid the usual wall where a seller-financer runs out of capital after a few houses.
Repapering a bad note later means going back to the borrower and getting cooperation on new signatures. Doing it right the first time is cheaper.
Frequently asked questions
How much more can a landlord net by seller financing instead of renting the same house?
Eddie Speed’s model puts it at roughly 2.5x net. On an $1,800 rent house — the U.S. single-family average — about half of gross rent is consumed by expenses over time, leaving around $900 before debt service. The same house owner-financed carries roughly a $1,900 to $2,000 payment with no landlord expense obligation.
That is a model, not a guarantee. Speed is direct that it has to be tested property by property, and that some houses simply won’t pencil.
What down payment should I require from a seller-finance buyer?
Ten to twenty percent. Ten percent works for a buyer who can prove income and demonstrate a track record of paying creditors back. ITIN buyers are typically 20%, because that is what the broader non-QM market requires on those files.
The down payment is also one of the six factors that determines what your note is worth if you later sell it, so a thin down payment costs you twice.
Can I sell the property for more than market value if I’m carrying the financing?
Speed says no, and he’s blunt about it. He cites Dodd-Frank compliance as one reason and the borrower’s future motivation as the other — an overpriced house gives someone a reason to stop paying down the road.
The premium you’re entitled to is the interest rate, not the price. You’re making what functions as a non-QM loan, and the market prices that risk higher. He described a customer who oversold a property and then got clobbered trying to sell the note on the secondary market.
Which rentals are wrong for a seller-finance conversion?
Houses at either end of the price band, anything not in an owner-occupied-caliber neighborhood, and any property whose likely buyer is another investor. In executive-price neighborhoods, the higher non-QM rate doesn’t fit what the neighborhood delivers.
Multi-unit assets are out. A fourplex sold to a landlord just recreates the expense problem on the buyer’s side, which is the exact thing the strategy is designed to eliminate.
Can I sell part of the note and still keep monthly cash flow?
Yes — that’s the partial note sale, and in a rental conversion it happens virtually simultaneously with note creation. If the payment is $2,000, you might sell $1,400 of it and keep $600, or sell $1,500 and keep $500.
The lump sum pays off the underlying debt on the property and frees capital for the next acquisition while you retain monthly income. It’s the mechanism that lets an investor do this repeatedly instead of running out of money after a few deals.
What makes a seller-finance note lose value on the secondary market?
Any weakness in the six drivers: a marginal borrower, questionable collateral value, thin equity, off-market terms, spotty pay history, or homemade paperwork. An inflated sale price hits two of those at once — collateral value and equity — which is why overselling gets punished hard at the note sale.
On documentation specifically, the benchmark is homogeneity: attorney-drawn documents, correct disclosures, compliant underwriting, all looking the same deal to deal. Repapering after the fact is possible but requires the borrower’s cooperation and a lot of work.
The bottom line
Pick your three worst-performing rentals and model each one as a note before you model anything else — actual expense history over the full hold, not a pro forma percentage, against a realistic non-QM payment and a buyer who can put 10% to 20% down. If it doesn’t pencil on a given house, don’t force it; the strategy fits a share of single-family rentals, not all of them.
