| This is not an article about tricks for 100% (no | | | | described above usually include an interest-only |
| money down) financing. Even if you do take | | | | option. That is, each month you have the option |
| advantage of various no money down strategies | | | | of paying either the minimum payment described |
| from time to time, these strategies are not | | | | above or an interest-only payment. Other loans |
| generally applicable when you begin investing | | | | do not have the minimum payment option and |
| systematically in multiple rental homes with the | | | | have only an interest-only payment option. In any |
| goal of making significant rental income. | | | | case, when you make an interest-only payment, |
| This is because some of these strategies require | | | | you are paying only the interest for the month, |
| a degree of deceit and careful timing, others | | | | and not paying down the principle. This reduces |
| require difficult-to-find pricing or seller situations, | | | | your monthly payment allowing positive cash flow |
| and others require sophisticated legal instruments | | | | in most cases, but of course you do not build up |
| and training, or a combination of all of the above. | | | | any equity in the property. |
| These complex strategies are good for selling | | | | As a general rule in most states, most loans are |
| mentoring programs, books and training courses. | | | | available with interest-only options nowadays. |
| However, none of these methods are practical, in | | | | Sometimes you have to pay a small fee at |
| our opinion, as a consistent practice for profitable | | | | closing for this option (typically .125% to .250%) |
| and stress-free ethical investing. For a consistent | | | | and sometimes there is no charge. If there is no |
| winning program of investing, you want to be able | | | | charge, you may find that the interest rate is a |
| to act quickly, repeatedly, openly and consistently, | | | | little higher. You just have to shop and compare |
| which will enable you to build up a portfolio of | | | | loans to get the best deal, as stated earlier, or |
| rental properties in a relatively short period of | | | | make sure your independent loan broker is |
| time. | | | | shopping for you. |
| It is therefore much more profitable and sensible | | | | Here is a comparison of three monthly payments |
| in our opinion to play it safe and keep it simple. | | | | plans |
| This means to focus on obtaining good | | | | 1) A typical minimum payment (in a payment |
| investments from the point of view of future | | | | option loan) |
| rental income and appreciation, and pay whatever | | | | 2) An interest-only payment (in a payment option |
| down payment the banks require. | | | | loan or any interest-only loan) |
| Simple as that. If you do this, you will be able to | | | | 3) A fully-amortized payment (in which you are |
| build up a portfolio of properties quickly. | | | | paying down the principle a little each month.) |
| You can still get very good loan deals by shopping | | | | For a $200,000 loan, a 1% minimum payment is |
| around for financing, or by using an independent | | | | $643 per month. By comparison, a typical 4.5% |
| loan broker. Make sure your loan broker shops | | | | interest-only adjustable rate loan produces a |
| around on your behalf. Standard bank financing at | | | | monthly payment of $750. Lastly, a fully |
| good interest rates generally needs only a 5% to | | | | amortized 4.5% payment is $1013. |
| 10% down payment for investment property, | | | | You can see that the minimum payment and the |
| which is not very much in the big picture. | | | | interest-only options are low and fairly close but |
| Unless you are going to flip a property quickly, | | | | the fully amortized loan can make a significant |
| you probably want to maintain positive cash flow | | | | dent in your cash flow. |
| for most of the time you own a rental property. | | | | Beware that the minimum payment in a payment |
| This is true even if you eventually plan to sell the | | | | option loan and the interest-only option in any loan |
| property at a profit. After all, you never know | | | | program lasts (generally) for only 5 years. |
| how long you may have to hold the property | | | | However, there are interest-only loans where the |
| before its value appreciates significantly, | | | | interest only option lasts 10 years. The latter is |
| particularly if you have to survive the inevitable | | | | preferable if your intention is to hold the property |
| down turn in property values which can last a | | | | for more than 5 years without refinancing. |
| year or more. The only way to ensure you can | | | | Beware also that, in order to get the low |
| comfortably hold the property as long as you | | | | interest-only rate I have used in the example |
| need is to have positive cash flow each month. | | | | above (about 4.5%), you would need to accept |
| To this end, consider the advantages of paying a | | | | an adjustable rate mortgage (ARM) program |
| full 20% to 25% down payment. This will allow | | | | where the rates adjust annually or even more |
| you to qualify for the lowest interest rate | | | | often. If interest rates jump significantly in the |
| programs. Lower interest rates mean lower | | | | next two years, you could get stuck with a |
| monthly payments, which mean positive cash | | | | relatively high payment. |
| flow. In fact, with a 20% to 25% down, you may | | | | We are recommending for most borrowers who |
| qualify for so-called "payment option loans" with | | | | plan to hold properties for more than a year or |
| minimum payment rates as low as 1%. With | | | | two to either: |
| these loans, the minimum payment stays low for | | | | 1) Obtain a "payment option loan" as described |
| the first 5 years, with a payment increase cap | | | | earlier with minimum payments that last a full 5 |
| each year of just 1.075 times the previous year's | | | | years, or |
| monthly payment. At these levels, you will almost | | | | 2) Obtain an adjustable rate mortgage (ARM) loan |
| assuredly achieve a very good positive cash flow. | | | | with an initial fixed interest period of 5 years. This |
| With such minimum payment loans, you still have | | | | will cost 1% to 2% more in rate, but the |
| to pay the current adjustable rate (usually around | | | | insurance is absolutely worth it, in our opinion, at |
| 4.5% today). However, most of the interest is | | | | this time in the real estate cycle. |
| deferred. At the end of 5 years, the deferred | | | | This article has reviewed some modern strategies |
| interest is added onto the loan balance. This will | | | | for minimizing your loan payments when |
| probably be much less than the property has | | | | purchasing investment rental homes. There is |
| appreciated. Therefore, it is a small price to pay | | | | much more to say on this topic. So keep an eye |
| for the positive cash flow gained during the first 5 | | | | out for additional articles by the same authors on |
| years. | | | | this and related topics. |
| Another option readily available today is "interest | | | | (c) Copyright 2004, Jeanette J. Fisher and Robert |
| only" payments. The "payment option loans" | | | | S. Kramarz. All rights reserved. |