Arm? Int Only? 15 Yr? 30 Yr?
I'm curious is anyone has run the numbers on the best way to finance a property... Taking into account appreciation value, inflation, etc, with our decent int rates these days...
You can try to payoff your loans as fast as possible, so that in 15 years or so, you have ALL cashflow (well, minus insurance and taxes, etc) from a property. In 15 years, I don't know of a better cashflow than having a mortgage-free property with a renter in it, with higher rental rates than now, and smaller cashflows for the 1st 15 years.
--OR--
You can go the other route- go for say, a 30 year loan at a decent APR, and pay them off EVENTUALLY, but have better cashflow now. This might losen up more money to do more deals with now. BUT- you're going to have payments for a much longer time. In the end, yes, you'll enjoy higher cashflows for 30 years, but that's just it- it'll take you much longer to get them paid off... In terms of the compounding interest on a loan, I'd be curious to see which route is better...
--OR--
You can go with interst only loans and such- just plan on NEVER paying the house off in full- keeping your cashflows at the highest, but, you never ever pay the property off. I guess, you can always sell and cash in on the appreciation and equity you walked in with eventually. But- you enjoy highest cashflows forever (well, in theory).
So, which way to go? I'd like to see some financial side by side comparisons on this- is there someone out there who can run the numbers? I guess one fear is that there is too much of a gamble on NEVER paying off the property- just banking on rental rates going up and up. You can have passive income at the highest, provided rental rates stay the same or improve. One thing's for sure- if you payoff the property, there is no higher cashflow than a paid in full property with a tenant. Soo- any thoughts from the 'Big Boys'??? I'm really curious as to your personal preferences and why...
Thanks!
The key is diversification:
-Buy SFR's in decent areas at 80% of
market value or less. Put 15-year fixed
financing with positive monthly cash-flow
-Buy units at 80% of market value or less
with interest only financing. Get rich off
the appreciation and monthly cash-flow.
For example, a million dollar triplex
at 10% a year appreciation would make
you $100k, not to mention the positive
cash-flow. Imagine having 5-10 of
these.
- Put a 30-year fixed mortgage on your
primary residence, rent it out with a
small monthly cash flow.
- Go buy your dream house with an
interest only loan. Live there practically
for free with tax break and get rich off
appreciation. Or go lease option your
dream house with 3-4 one year options
giving you the opportunity to purchase
later on down the road at today's prices.
-Take your positive cash flow and start
paying off one house at a time, hence
creating the snowball effect.
Continue to invest in real-estate utilizing
techniques that will help you take care
of today's cash-flow needs:
-Wholesaling properties
-Retailing properties
-Lease optioning properties
Best Riches,
Jeffrey Adam
P.S.- If you are going to work hard in real-
estate, you might as well live your
dream life, you only live once!
[addsig]
Here is what I currently do. I use a 30 yr fixed, and then I have it set up to have automatic extra payments to principal so the house would be paid off in 15-20yrs. Then if money gets tight at any point, I have the option of stopping the extra payments to principal to increase my cashflow. I don't like the idea of using interest free loans or simply dragging the payments out over 30 years. The danger to me is that the properties could actually decrease in value over that time period. If I had to sell the at some point in the future, I wouldn't want to have to pay someone to take them! Some may say that's not likely, but almost all of my best rental properties were purchased in areas that have either had stagnant or falling values.
I use mixed strategies. I think it's really depends how tight your cash reserve, appreciation, goals, vacancy rate, and risks that you are willing to take.
For properties with 2 digit appreciation, I put 5/10% down with break-even/positive cash flow. My lender allows me to stop PMI after 1 yr. I will use appreciation to stop PMI. Each lender has different rules on PMI, please check with your lender.
I pair 15 yrs fixed and 30 yrs fixed. The negative cash flow of 15 yrs term balance out with 30 yrs one.
Since the rate is really good right now, I do not consider ARM or interest only at this time. I want to lock current good rate. I will consider ARM or interest only if I plan to sell/refinance the house in less than 10 yrs or when I expect the interest rate will drop the next x years. For example, if I plan to sell the house in 5 yrs then I will choose 5/1 ARM or 5 yrs interest only.
Currently, I lean more on 30yrs fixed for 2 reasons: 1) I want to lock the low interest rate as long as possible, 2) my future income is uncertain. I plan to keep my properties for a long time.
When I think I have extra cash the next 1-3 yrs, I use 80,15. I pay off second mortgage ASAP. That way I have positive cash flow once I pay off the second mortgage. Also I avoid paying PMI without having 20% at closing.
When I have a lot of cash reserve, I put 5% down and buy properties with low vacancy as many as I can.
Bottom line is the strategy is really depends on individual conditions, and preference. And also what you believe where the future direction will be.
[ Edited by ew86 on Date 01/23/2004 ][ Edited by ew86 on Date 01/23/2004 ]