When the buyer's income looks fine but the property is the risk, how do you price that into the note

The misconception worth correcting first: personal income as a secondary repayment source only functions that way if the note documents it as a personal guarantee with explicit recourse language, and most seller-carried notes on small multifamily do not include that sentence.

On the actual question, the rate should carry two separable spreads, one for borrower credit risk and one for property cash flow risk, and most sellers collapse them into a single felt number because they are doing one underwrite, not two. The property-level spread should reflect the break-even occupancy against the debt service on your note specifically, not the total capital stack, so take that six-unit, calculate what occupancy rate covers interest only on the seller carry at eight percent, and ask whether that number gives you enough cushion to survive a bad lease-up year before the balloon forces a refinance or a conversation. If break-even is 68 percent and the market vacancy in that submarket runs 15 percent in soft years, eight percent is not a property-risk-adjusted rate, it is a buyer-quality rate that got lucky because nothing went wrong in year one. The balloon date also does work here that the rate never gets credit for: a five-year balloon on a six-unit means the refinance risk lands entirely on the buyer at whatever cap rate environment exists in year five, and if values compressed, the buyer may not be able to refi out of your note even with perfect personal income, which is the moment he decides which obligation he protects. Did the note include any occupancy covenant or cash flow trigger that would accelerate the balloon or modify the rate, because that is the clause that actually prices property risk into the instrument?

This is a genuinely useful case to pull apart, and I want to be upfront that I have not carried a note myself, so what follows is how the mechanics work rather than what I have done.

The distinction you are drawing is the right one. A buyer's W-2 income is a secondary repayment source, meaning it sits behind the property's cash flow in the order of what actually services the note month to month. If the six-unit is what pays the debt, then the six-unit is where the real underwriting lives. Personal income matters most in a workout scenario, and even there, as you point out, a seller-held note competes with a mortgage, a car payment, and every other obligation the buyer has.

Lenders who price multi-family risk professionally tend to set a rate on the deal, then adjust for borrower quality as a secondary modifier. The property-level number comes first. It would look something like: what spread does a 70 percent loan-to-value position on a six-unit with realistic vacancy earn at arm's length, then does the borrower's profile tighten or widen that spread. In the example you described, the rate appears to have skipped the first question and gone straight to the second.

Whether most individual seller-financiers actually do that work as two separate steps, I genuinely do not know, and I would be cautious about anyone who claims they do it consistently. The guide section on seller financing points to buyer vetting as the documented focus, and property-level stress testing gets less airtime.

The question I would bring back to the room: when you set occupancy assumptions in year one, did you stress them at all, or did you underwrite to asking-price proforma numbers?