What is the conventional wisdom on using an option ARM to finance the purchase of a rental property? Does it make sense if it allows the new property to cash flow?
Thank You. The advice I am being given says to use the "Negative AM" model in order to cash flow the property in our market - Pacific NW. The throught is that the cash flow and the appreciation will out pace the negative am loan. I know a lot of people investing this way right now as it seems the only way to get a property to cash flow.
If you fully understand the loan product and use the extra cash wisely. (invest it dont spend it). Then these loans are not a problem. Let me run a few things by you.
What would be your maximum negative balance? Usually 115%.
Making min payments how long will it take for you to max out?
Do you know what happens then and would you have a plan?
In my limited understanding of the option ARM, the minimum payment option and the interest only option are only available for the first five years of the loan.
At the end of the fifth year, the loan converts to a 25 year, fully amortizing loan at whatever the prevailing interest rate is for the ARM at the time. It still remains an ARM, but only fully amortizing payment options are available. The loan balance at the end of the fifth year becomes the new loan amount when the loan is recast to a fully amortizing loan. This is when you start paying back all that negative amortization you may have accrued.
Thank You Monkfish. We are projecting an 8% annual increase for property values while betting that we can raise rents 5% per year. Even at these numbers the deal seems to work.
Hmmm…if it were me, I think I would run the numbers with 0% appreciation and 0% increase in rents. If it doesn’t at least break even (after maintenance, vacancies, marketing, etc.), I wouldn’t do it. But that’s just me.
As long as you have some equity in the property, ARM option loans are excellent cash flow generators. Always have an exit strategy consistent with the projections on your loan payments.
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Thank You. The advice I am being given says to use the "Negative AM" model in order to cash flow the property in our market - Pacific NW. The throught is that the cash flow and the appreciation will out pace the negative am loan. I know a lot of people investing this way right now as it seems the only way to get a property to cash flow.
Thanks for your time!
If you fully understand the loan product and use the extra cash wisely. (invest it dont spend it). Then these loans are not a problem. Let me run a few things by you.
What would be your maximum negative balance? Usually 115%.
Making min payments how long will it take for you to max out?
Do you know what happens then and would you have a plan?
When would your loan recast?
Do you know what happens then?
Do you have a plan?
What would be your max cap rate?
Do property values always go up?
[ Edited by lacashman on Date 11/25/2006 ][ Edited by lacashman on Date 11/25/2006 ]
In my limited understanding of the option ARM, the minimum payment option and the interest only option are only available for the first five years of the loan.
At the end of the fifth year, the loan converts to a 25 year, fully amortizing loan at whatever the prevailing interest rate is for the ARM at the time. It still remains an ARM, but only fully amortizing payment options are available. The loan balance at the end of the fifth year becomes the new loan amount when the loan is recast to a fully amortizing loan. This is when you start paying back all that negative amortization you may have accrued.
Thank You Monkfish. We are projecting an 8% annual increase for property values while betting that we can raise rents 5% per year. Even at these numbers the deal seems to work.
THANK YOU FOR YOUR INFO!
Hmmm…if it were me, I think I would run the numbers with 0% appreciation and 0% increase in rents. If it doesn’t at least break even (after maintenance, vacancies, marketing, etc.), I wouldn’t do it. But that’s just me.
As long as you have some equity in the property, ARM option loans are excellent cash flow generators. Always have an exit strategy consistent with the projections on your loan payments.
[addsig]