Need Advice On Financing An Investment
I posted this on another thread and was advised to paste it here so I can receive advice on various methods of financing that would apply to this specific situation.
Thanks in advance to all who respond!
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I am a retired U.S. Marine and am currently in an executive position in a publicly traded sales firm.
I am very fortunate in that when I retired from the Marines I joined a great company that has really taken care of me. I am well paid and when the firm does well, I receive large bonuses.
I want to invest in real estate in the San Dimas, California area. I want to buy a home and rent it to a family member who lives there. He is entirely trustworthy and is also a skilled carpenter, plumber and overall "Mr. Fixit". He would definitely take good care of the home and would be able to handle most repairs, etc. My relative is in need of assistance. He is attending college full time and I want to help him and his family by providing them with a nice home at little or no cost. They are great folks and will take good care of the property. I trust them completely.
I do know that the homes in the area have a history of steady appreciation. My plan is to buy this home and hold onto it for at least 5-7 years, maybe longer, before selling it. I am obviously banking on the assumption that the house will appreciate in value over the long term.
I have superb credit and can come up with a lot of cash, but I know there are many alternative ways to buy a property and I'd like your advice on some of them. I can pay cash for this home, but I do not want to tie up this much money in it.
Also, my relative does not earn a high income and he won't be able to pay rent equal to or greater than the mortgage payment. I am willing to accept a negative cash flow situation in exchange for the long term payoff. I have the financial resources to absorb the entire monthly mortgage payment and will do so if necessary.
My thought is that while I provide assistance to this family, the house will definitely appreciate in value like any good investment. If I can get the house for little or nothing down, I'd like to do so.
Are there ways I can do both - get the property without putting a lot of money down and obtaining financing that results in a low monthly payment my relative would be able to meet?
I am very interested in hearing the advice of experienced investors.
Thanks in advance!
Gladiator0302,
An Interest only mortgage (also referred to as an executive mortgage) can be an excellent choice. They are designed to offer the lowest payment possible as you are not paying anything toward the principal in your normal monthly payment. Because of the lower payment, the interest only loan may mean that you can buy more home than with a fully amortizing mortgage. Of course, you may make additional payments toward your principal balance at any time.
The interest only product was originally designed for individuals whose income is cyclical. For example, an individual who is a sales executive with a relatively low base salary but commission or bonus pay outs quarterly would benefit from an interest only mortgage. You would have the lowest possible payment during months when no bonus is paid (or while your relative is in school) and you would be able to make contributions to the principal balance when the quarterly bonus is paid. Choosing this option ia a method of lowering the payment, sometimes significantly.
Generally, interest only mortgages are available for a 30 year term, with the first 5 or 10 years interest only (depending on the lender selected) and the final 20 to 25 years fully amortizing, some progressive lenders offer this option on ARMs. Some lenders who offer an interest only mortgage require a prepayment penalty for the first 1-3 years and have caps on the amount your rate can change at any time and over the life of the loan. Always try to avoid prepayment penalties on these and other types of loans, sometimes you can usually work around the requirement. Another useful feature of some interest only mortgages is that if you choose to make a principal payment during the interest only period, your balance is reduced the following month lowering your payment further.
I'm sure you can see some benefits here.
Hope this helps. 8-)