You found a motivated seller who's willing to carry the note. The terms look good on paper, but now you need to figure out whether this deal actually makes sense for your portfolio. Standard cash-on-cash calculations assume conventional financing, and seller financing changes the math in ways that can either boost your returns or hide problems.
Why Seller Financing Changes Your Return Calculation
With a traditional bank loan, your cash invested is straightforward: down payment plus closing costs. The bank handles everything else. With seller financing, the structure gets more flexible, and that flexibility directly impacts your cash-on-cash return.
Seller financing typically involves:
Each of these variables changes either your cash invested (the denominator) or your annual cash flow (the numerator). Miss one adjustment and your return calculation is wrong.
The Basic Cash-on-Cash Formula
Before adding seller financing complexity, here's the formula:
> Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested × 100
Annual Pre-Tax Cash Flow is your rental income minus all operating expenses minus your debt service (mortgage payments).
Total Cash Invested includes your down payment, closing costs, and any immediate repairs or renovations needed to make the property rent-ready.
The formula itself doesn't change with seller financing. What changes is how you calculate the inputs.
Calculating Your Cash Invested with Seller Financing
Bank loans have predictable costs. Seller financing doesn't. Here's what to account for:
Down Payment
Sellers set their own requirements. I've seen deals close with 5% down and others requiring 30%. The negotiation depends on the seller's motivation, the property condition, and how much they trust you to make payments.
A lower down payment reduces your cash invested, which mathematically increases your cash-on-cash return. But remember: a higher loan balance means higher monthly payments, which reduces cash flow. These two factors partially offset each other.
Closing Costs
Seller-financed deals typically have lower closing costs than bank loans. You avoid:
You still pay for title insurance, recording fees, attorney costs if you use one, and any inspections you choose to do. Budget 1% to 2% of purchase price for closing costs on a seller-financed deal, compared to 2% to 5% with conventional financing.
Points or Loan Fees to the Seller
Some sellers charge points similar to what banks charge. This is negotiable. If the seller asks for 2 points on a $200,000 loan, that's $4,000 added to your cash invested.
Calculating Annual Cash Flow with Seller Financing
Your debt service calculation changes based on the loan terms you negotiate.
Interest Rate Impact
Seller financing rates often run 1% to 3% above conventional rates. The seller is taking on risk that a bank would spread across thousands of loans, so they want compensation. But motivated sellers sometimes offer at-market or below-market rates to move the property quickly.
On a $160,000 loan:
That 4% rate difference translates to $445/month in cash flow. Over a year, that's $5,340 that either stays in your pocket or goes to the seller.
Amortization Period
Sellers rarely want to wait 30 years to get their money back. Many seller-financed deals use shorter amortization periods (15-20 years) or have balloon payments.
A 15-year amortization on that same $160,000 at 8%:
Shorter amortization builds equity faster but crushes monthly cash flow. You need to decide whether you're optimizing for current income or long-term wealth building.
Balloon Payments
Many seller-financed deals include a balloon payment due in 3 to 7 years. The loan might amortize over 30 years (keeping payments low) but require full payoff after 5 years.
This structure gives you better cash flow now but creates refinance risk later. For your cash-on-cash calculation, use the actual monthly payment during your holding period. Just remember that balloon payments represent a future capital event you need to plan for.
A Complete Worked Example
Let me walk through a real scenario.
The Property:
Seller Financing Terms:
Step 1: Calculate Total Cash Invested
| Item | Amount |
|---|---|
| Down payment | $27,750 |
| Points to seller | $1,573 |
| Closing costs | $2,800 |
| **Total Cash Invested** | **$32,123** |
Step 2: Calculate Monthly Debt Service
Using the standard mortgage formula for $157,250 at 7.5% over 30 years:
Monthly P&I = $1,099
Step 3: Calculate Annual Cash Flow
| Income/Expense | Monthly | Annual |
|---|---|---|
| Gross rent | $1,650 | $19,800 |
| Operating expenses | ($517) | ($6,200) |
| Debt service | ($1,099) | ($13,188) |
| **Net Cash Flow** | **$34** | **$412** |
Step 4: Calculate Cash-on-Cash Return
> $412 ÷ $32,123 × 100 = 1.28%
That's a weak return. The 7.5% interest rate and 15% down payment aren't leaving much cash flow. Let's see how different terms change the picture.
How Different Terms Change Your Returns
Using the same property, here's how various seller financing structures affect cash-on-cash:
| Scenario | Down Payment | Rate | Monthly P&I | Annual Cash Flow | Cash-on-Cash |
|---|---|---|---|---|---|
| Base case | 15% | 7.5% | $1,099 | $412 | 1.28% |
| Lower rate | 15% | 6.0% | $942 | $2,296 | 7.15% |
| Lower down | 10% | 7.5% | $1,164 | ($368) | Negative |
| Lower both | 10% | 6.0% | $998 | $1,624 | 7.39% |
| Interest-only | 15% | 7.5% | $983 | $1,804 | 5.62% |
The interest rate matters more than the down payment percentage for cash flow. Negotiating a 1.5% rate reduction does more for your returns than getting the down payment cut in half.
Interest-only payments (common in seller financing) dramatically improve cash flow but build zero equity through amortization. That's a tradeoff you need to understand going in.
Comparing to Conventional Financing
Is seller financing actually better? Let's compare.
Conventional Loan on the Same Property:
Cash-on-Cash Calculation:
The Comparison:
| Metric | Seller Financed | Conventional |
|---|---|---|
| Cash invested | $32,123 | $51,750 |
| Annual cash flow | $412 | $2,524 |
| Cash-on-cash return | 1.28% | 4.88% |
In this scenario, conventional financing produces better cash-on-cash returns despite the higher down payment. The lower interest rate and lower loan balance offset the additional capital required.
But seller financing lets you keep $19,627 in your pocket. If you can deploy that capital into another deal earning 6%+, your overall portfolio return might be higher with seller financing.
Common Mistakes When Calculating Seller Financing Returns
Mistake 1: Ignoring Points and Fees
Some investors calculate cash invested as just the down payment. If the seller charges 2 points on a $160,000 loan, that's $3,200 you're leaving out of your return calculation. Your actual cash-on-cash is lower than you think.
Mistake 2: Using the Wrong Amortization
A 5-year balloon with 30-year amortization isn't the same as a 5-year loan. Your monthly payment is based on the amortization schedule, not the balloon date. I've seen investors use balloon payment amounts in their cash flow projections, which makes no sense. Use the actual monthly payment you'll make during your hold period.
Mistake 3: Forgetting the Balloon Payment Risk
Your cash-on-cash might look great for years 1 through 4, but what happens in year 5 when $150,000 comes due? If interest rates rise or your credit situation changes, refinancing might cost you 2 to 3 points plus higher payments going forward. Factor this into your exit strategy, even if it doesn't show up in the cash-on-cash formula.
Mistake 4: Comparing Apples to Oranges
Seller financing with 10% down and conventional financing with 25% down aren't directly comparable using cash-on-cash alone. You need to consider:
Tax Implications Worth Knowing
Seller financing creates an [installment sale](https://www.irs.gov/taxtopics/tc705) for the seller, which has tax benefits for them. For you as the buyer, the tax treatment is similar to conventional financing: mortgage interest is deductible against rental income, and you depreciate the property the same way.
One difference: if the seller is also selling you personal property (appliances, furniture) as part of the deal, make sure your contract breaks out those values separately. You depreciate personal property faster than real estate, which helps your tax situation.
When Seller Financing Makes Sense Despite Lower Returns
I've done seller-financed deals that showed lower cash-on-cash than I could have gotten conventionally. Here's when it still made sense:
Speed matters. Bank financing takes 30 to 45 days minimum. Seller financing can close in a week if title is clean. If the deal is competitive, speed wins.
Credit issues. Maybe your debt-to-income ratio is stretched or you have a recent credit event. Sellers don't pull credit reports or calculate DTI. They care about your down payment and your character.
Portfolio strategy. Lower down payments let you spread capital across more properties. Four properties at 10% down builds more long-term wealth than two properties at 25% down, assuming similar appreciation and rent growth.
Negotiation leverage. Sellers offering financing often accept lower prices because they get ongoing income and potentially better tax treatment. A $185,000 seller-financed price might compare favorably to $195,000 with conventional financing.
Running Your Own Numbers
Every seller-financing deal is unique. The terms are negotiable, which means your return is negotiable. Before you commit, model multiple scenarios:
The [single family rental calculator](/tools/single-family) handles seller financing scenarios. Plug in your negotiated terms and see exactly how different interest rates, down payments, and amortization periods affect your returns. The math takes 30 seconds once you have the inputs.
Seller financing can be a powerful tool for building a rental portfolio. Just make sure you're calculating the returns correctly before you sign.