A real-estate investor who owns over 700 rental units shares the secret to getting a 5% interest rate, and says most people don’t realize this option exists

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• Matthew Tortoriello has been able to secure interest rates as low as 2% through seller financing.
• He says buyers must understand what to ask for and how to lead the discussion of a deal.
• He offers two key steps that can increase the chances of securing a lower rate.

The average 30-year fixed mortgage rate was 7.26% on Tuesday. It’s a significant increase from where rates were in 2021, when they fell below 3%. Commercial property loans followed closely behind, at around 7%, according to Commloan, a commercial lender.

Higher interest rates imply higher monthly payments, which is unappealing to real-estate investors like Matthew Tortoriello, who is looking for properties with positive cash flow.

Fortunately, there are alternatives to using a bank, one of which is seller financing, a process in which the seller also serves as the lender. Tortoriello used it in early November when he paid $1.9 million for a fully occupied, five-tenant medical office building in Holyoke, Massachusetts, according to documents obtained by Insider. Long-term leases generated $24,469 in monthly rent revenue for the property.

It was an opportunity to add another cash-flowing asset to his and his business partner’s portfolio of over 700 rental units.

However, if he had to go to a bank, the property’s net profit would have been reduced due to high interest rates. Tortoriello was able to persuade the seller to finance the sale of the property instead. According to documents reviewed by Insider, the seller agreed to finance 60% of the loan to value of the total purchase price at a 5% interest rate for a term of 15 years with an amortization schedule based on 30 years if he put down 40%.

At 5%, he calculated that his net profit would be $9,978 after debt servicing, which is a monthly payment of $6,119, plus additional expenses such as taxes, insurance, heat, electricity, capital improvement, and management fees. If he had gone to a bank, his debt service would have been $11,479 at a 7.5% interest rate; after expenses, his net profit would have been closer to $4,618.

It wasn’t the first time he got a rate lower than the market. He closed on a $1 million loan for a commercial property in Chicopee, Massachusetts, in August 2022. According to documents reviewed by Insider, he secured an interest rate of 2% for the first five years and then 3% for the next seven years, amortized over 30 years. The average mortgage rate that month was as high as 5.7%.

Seller financing is uncommon, but it becomes more appealing as interest rates rise.

Securing seller financing

Seller financing is not a widely advertised option, nor is it something that a property owner is likely to offer to a buyer. Most people on both sides of a transaction are unaware of this. However, it is something that the buyer can initiate.

“People don’t consider the strategy because so many people are accustomed to low interest rates.” “They’ve used banks for years,” Tortoriello explained.

However, there are other reasons why seller financing isn’t more popular: most sellers do not want or are unable to bear the risks that banks do.

According to Chris Gerbig, an investor who has been on both sides of a seller-financing transaction, while it has advantages, buyers who plan to rely on a property’s cash flow to cover their monthly payments should double-check their math: If they default, they will lose the property.

According to Shmuel Shayowitz, president and chief lending officer at Approved Funding, a licensed mortgage bank, seller financing can help buyers obtain terms that are more favorable than those offered by banks.

However, most sellers are hesitant to agree to long-term funding, such as 30 years, and prefer two to five years. So, if the goal is to save money on interest, it’s a good idea for a buyer to wait out higher rates. However, if it is because the buyer did not qualify for a bank mortgage, there is a risk because once that term expires, they may not be able to secure financing to pay the lender in full.

“So if you can’t finance, then I would say don’t just go into that just because it’s an option and then kick the can down the road and worry about it in a year or two or three from now,” he said. “However, if a person is in a position to finance, refinance, and obtain a mortgage, then this is an arbitrage, a way to save on interest rates.” Then they could refinance at any time, even if the interest rate was higher.”

According to Tortoriello, there are two key steps that can increase the likelihood of landing a deal.

The first step is to find a seller who is eager to work with you. Finding a property with an old loan or no loan, for example, can help narrow down a good candidate. The less the property owner owes on it, the more interest payments they can keep.

Tortoriello searches the deeds registry in the state or county where the property is located to see if it has a mortgage or loan on it. If the loan is more than 15 years old or does not exist, a property owner is more likely to accept a seller-financing deal, he says. However, if the loan is more recent, the remaining balance is likely too high, and it would not make sense for the seller because they would not receive enough equity.

Tortoriello secured a medical building with an 18-year-old mortgage. When he went to see the property with his agent, the owner was there, and he was able to meet him and understand his needs. This aided in determining potential limits during negotiations.

Tortoriello, for example, knew it would be an easier conversation once he realized the seller was a Certified Public Accountant and a real-estate investor, because a CPA can more easily understand the benefits of this type of deal.

This leads him to the second step, which is to show how this option would allow the seller to walk away with more money.

The obvious advantage is that they will be paid interest over the life of the loan. The less obvious benefits, however, are the tax implications. The seller will not have to pay any capital-gains taxes in the year the property is sold. He noted that accepting smaller payments spread out over a number of years could offset some of that.

“They also have other things that they can depreciate or offset their gain with, but they might not have enough in year one to offset the full million,” Tortoriello told reporters. “However, over the course of ten years, they can use depreciation from other properties or whatever to help offset their gain.” As a result, they are minimizing their gain over those ten years.”

The key is to be a good negotiator and present a deal that benefits both parties, he says. When offering an interest rate, start low because the seller is likely to counter, but not so low that it insults them.

“I put myself in their head,” Tortoriello explained. “So, if they’re looking to basically cash out a bunch of money and just sit on it, put it into a CD or something like that, I’m thinking, well, what is the current rate of CDs or money market accounts?” It’s quite liquid, but many money markets are currently paying 3.75%, so I might start there.”