Is anyone using all interest loans as a strategy?
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesQuote from @Eliott Elias:
What's your long term play? If you're holding 10 years+ avoid interest only, you're wasting time. If appreciation is your game (which I don't recommend) interest only is fine to make the property cash flow.
83 Replies
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Kristen L Garner:
I see IO loans used most heavily with my fix and flip borrowers. We also utilize an IO period to help get DSCR ratios down when doing purchases or refis where the DSCR ratio is on the boarder of making or breaking the deal.
Hello Kristin, as a lender, why most lenders didn't offer IO products with a rate lower than 30YFRM's rate? They are mostly at a similar rate.
- Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes3y
I would be careful if I lived in a deficiency judgment state (anywhere outside of AL, CA, MN, MT, OR and WA). A drop in property values and tightening in the rental market and the likelihood you will get popped for a deficiency in case you can no longer make IO payments heightens dramatically. Much of successful REI is really about maintaining sufficient liquidity to outlast the storms that are bound to come.
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Carlos Ptriawan:
Quote from @V.G Jason:
This is probably the only way to do it in area where it makes sense too with appreciation. The first 10 years are minute equity, 8-10% but that 8-10% is more than nothing. The nothing doesn't cover your seller fees if you sell even off of a 5-6% appreciation, and god forbid you had any tenant issues or capex concerns. Finding low IO and then paying down equity.Quote from @Carlos Ptriawan:
This is why I am not afraid of interest rate changes.Quote from @John M.:
Who offers 3-5% IO in today's world?That's the key there, first, 10 years is "minute" equity. Actually, if you think about it, 10Y IO 7% is not really that much different from 7% 30YFRM, they're all equally *bad* rates to invest in anyhow.
For a 300K loan, with 30YFRM on the first 10 years, the first ten years your principal is about $250/mo and interest portion $1750-ish, but on the tenth year, amortization table portion of interest is still $1450-1500 anyway. It's still bad. For IO, interest portion is constant $1750, not much different.
So how do I utilize the IO:
1. You make an additional principal that's double the 7%, so you add $500 every month
2. In the contrary, I prefer to invest in a place where location appreciation should be greater than 500*12=$6,000 a year.
3. Even better if your leverage ratio is 1:2 instead of traditional 1:4. If your leverage is 1:2 ; by adding principal, on the 10th year your equity is almost 90% LTV.
If location is not appreciating, then I'd rather put the money into 5% 1 year riskless CD.Is it really an IO loan, if you're still going to prepay the principal?
I think the premise is if you're going to invest in good areas, this is a very impractical avenue.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Darius Ogloza:
I would be careful if I lived in a deficiency judgment state (anywhere outside of AL, CA, MN, MT, OR and WA). A drop in property values and tightening in the rental market and the likelihood you will get popped for a deficiency in case you can no longer make IO payments heightens dramatically. Much of successful REI is really about maintaining sufficient liquidity to outlast the storms that are bound to come.
Preach.
This applies to almost all investing. Invest with understanding how you're going to weather the storm.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @V.G Jason:
Quote from @Carlos Ptriawan:
Quote from @V.G Jason:
This is probably the only way to do it in area where it makes sense too with appreciation. The first 10 years are minute equity, 8-10% but that 8-10% is more than nothing. The nothing doesn't cover your seller fees if you sell even off of a 5-6% appreciation, and god forbid you had any tenant issues or capex concerns. Finding low IO and then paying down equity.Quote from @Carlos Ptriawan:
This is why I am not afraid of interest rate changes.Quote from @John M.:
Who offers 3-5% IO in today's world?That's the key there, first, 10 years is "minute" equity. Actually, if you think about it, 10Y IO 7% is not really that much different from 7% 30YFRM, they're all equally *bad* rates to invest in anyhow.
For a 300K loan, with 30YFRM on the first 10 years, the first ten years your principal is about $250/mo and interest portion $1750-ish, but on the tenth year, amortization table portion of interest is still $1450-1500 anyway. It's still bad. For IO, interest portion is constant $1750, not much different.
So how do I utilize the IO:
1. You make an additional principal that's double the 7%, so you add $500 every month
2. In the contrary, I prefer to invest in a place where location appreciation should be greater than 500*12=$6,000 a year.
3. Even better if your leverage ratio is 1:2 instead of traditional 1:4. If your leverage is 1:2 ; by adding principal, on the 10th year your equity is almost 90% LTV.
If location is not appreciating, then I'd rather put the money into 5% 1 year riskless CD.Is it really an IO loan, if you're still going to prepay the principal?
I think the premise is if you're going to invest in good areas, this is a very impractical avenue.
haha , yes that's right..... but what i am saying is, 30YFRM 7% with IO loan of 6-7% doesn't really have wide differences.
I will run away with IO product in low rate environment, but with high IO, it's one of the option available that's worth to calculate in excel table. - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesExcept using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant's
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
- Member since 2020 · 671 posts · 937 votes3y
Wow. I'm in California and only started investing out of state fairly recently, so maybe that's why I've never heard of deficiency judgements. Crazy! Thanks for teaching me something today! haha.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Joe Villeneuve:
Except using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant'sQuote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
I don't view it that way.
I viewed it as saving or equity gain from "cash" that I do not need daily. In 8 10 year that money comes to me anyway and that money is useful to bring down the interest portion faster (in not-IO loan in high rate env).
But you are right also, I do have CF property that cash flow a lot with 2 something interest rate, for that house category, I do not add the principal at all. - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesYou're not saving equity...you're buying it. You're just transferring cash from your bank to the property. The tenant was doing that already for you...for free. When that cash was still in your bank, and if you wanted to use it, how much would it cost you to use? Nothing. If you use it, I mean spend it, to buy equity, and you want to use that equity (which was your cash), how much will it cost you now? Whatever the interest rate is at that time.
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Except using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant'sQuote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
I don't view it that way.
I viewed it as saving or equity gain from "cash" that I do not need daily. In 8 10 year that money comes to me anyway and that money is useful to bring down the interest portion faster (in not-IO loan in high rate env).
But you are right also, I do have CF property that cash flow a lot with 2 something interest rate, for that house category, I do not add the principal at all.
First of 2 Golden Rules of REI is to NEVER, under any circumstances, ever, SPEND your seed money (cash). Use it to infinity, but never spend it. When you spend it, like buying equity, that you were already getting for free, you get only one use out of it. Then, it will cost you to replace it. When you use it, no matter how many times you try to spend it, it keeps coming back to you,..."with friends". In other words, you get multiple uses out of the same "cash" (seed money), and it grows each time you "use" it. This also means that the one time cost of that seed money, if you originally had to pay for it, when that cost is applied to each use (spread out), reduces the cost per use, every time you reused it (with no added cost). So, if the original cost was covered by income, the entire system makes that original cost insignificant. - Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
First of 2 Golden Rules of REI is to NEVER, under any circumstances, ever, SPEND your seed money (cash). Use it to infinity, but never spend it. When you spend it, like buying equity, that you were already getting for free, you get only one use out of it. Then, it will cost you to replace it. When you use it, no matter how many times you try to spend it, it keeps coming back to you,..."with friends". In other words, you get multiple uses out of the same "cash" (seed money), and it grows each time you "use" it. This also means that the one time cost of that seed money, if you originally had to pay for it, when that cost is applied to each use (spread out), reduces the cost per use, every time you reused it (with no added cost). So, if the original cost was covered by income, the entire system makes that original cost insignificant.that maybe true in your area, cheap area with only few lunch money cash flow and no appreciation.
in our area with high appreciation, buying down principal is equal to saving money in the future as amortization for interest get lower faster (same principal as paying credit card).
fair to say, we do quite having different strategy here but i understand your circumstances, your theory is good to be applicable in higher CF environment. - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
The area doesn't matter. It's simple math and use of funds. My area? Cheap and only a few lunch money cash flow properties? No appreciation? Do your homework please.
- 3yJohn M.Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 798 votesOP
Interesting conversation. I am now thinking that I may need to diversify my debt over the whole portfolio. In other words I have too many traditional mortgages. I probably should convert half of them to all interest loans to increase my cash flow and diversify my equity. One could argue to convert all of them assuming you have enough equity for a traditional Principal and Interest REFI if needed down the road. Increased cash flow gives me more leverage to buy more property, enjoyment of lifestyle etc. If you bury too much capital in your property then eventually your Return on Equity can diminish and then you will be scrambling and paying to get the money out of that property when you need it. It's hard to put a number on the present value of cash and what it can do for you in the moment. @Allan C. said it well that the opportunity cost is real!
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votesYou are looking at all the positives, and that's great. If you don't keep enough capital set aside, you'll be destroyed when stuff happens. And in life.....stuff happens. I diversify debt, am a fan of it. IOs have a place, but a low place in it.
Quote from @John M.:
Interesting conversation. I am now thinking that I may need to diversify my debt over the whole portfolio. In other words I have too many traditional mortgages. I probably should convert half of them to all interest loans to increase my cash flow and diversify my equity. One could argue to convert all of them assuming you have enough equity for a traditional Principal and Interest REFI if needed down the road. Increased cash flow gives me more leverage to buy more property, enjoyment of lifestyle etc. If you bury too much capital in your property then eventually your Return on Equity can diminish and then you will be scrambling and paying to get the money out of that property when you need it. It's hard to put a number on the present value of cash and what it can do for you in the moment. @Allan C. said it well that the opportunity cost is real!
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Joe Villeneuve:
You're not saving equity...you're buying it. You're just transferring cash from your bank to the property. The tenant was doing that already for you...for free. When that cash was still in your bank, and if you wanted to use it, how much would it cost you to use? Nothing. If you use it, I mean spend it, to buy equity, and you want to use that equity (which was your cash), how much will it cost you now? Whatever the interest rate is at that time.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Except using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant'sQuote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
I don't view it that way.
I viewed it as saving or equity gain from "cash" that I do not need daily. In 8 10 year that money comes to me anyway and that money is useful to bring down the interest portion faster (in not-IO loan in high rate env).
But you are right also, I do have CF property that cash flow a lot with 2 something interest rate, for that house category, I do not add the principal at all.
First of 2 Golden Rules of REI is to NEVER, under any circumstances, ever, SPEND your seed money (cash). Use it to infinity, but never spend it. When you spend it, like buying equity, that you were already getting for free, you get only one use out of it. Then, it will cost you to replace it. When you use it, no matter how many times you try to spend it, it keeps coming back to you,..."with friends". In other words, you get multiple uses out of the same "cash" (seed money), and it grows each time you "use" it. This also means that the one time cost of that seed money, if you originally had to pay for it, when that cost is applied to each use (spread out), reduces the cost per use, every time you reused it (with no added cost). So, if the original cost was covered by income, the entire system makes that original cost insignificant.The golden rule of investing is to never be in position to HAVE to sell. Too much leverage puts you in that EXACT position. Leverage is a great tool, use it appropriately.
That whole notion of don't spend your cash always hold it & leverage instead, I get it. Mathematically, makes sense and logically too. But live in real life some and understand the nuances of the economy taking a downturn and you being stuck. Nobody that says that, does that at scale. They leverage and spend the cash. It's people that dream of having that kind of cash, that actually say that. Thinking that theory is beautiful in paper, but not understand living in it. It's like they have a fantasy with the fabric of the thought, and can't fathom why people don't.
Go live in it, I am in a particular position where I could keep all cash aside and just put downpayment money in and let the cash sit against the properties. I will for some, but no way would I do that for my entire portfolio. You're asking for trouble.
Say you had $8mil to invest. And use that example, most people would say go put $2mil on downpayments and be $8mil leveraged in houses. 1:1, you can always pay it off. "Other" people are paying your note, why are you? Cause smarty pants when they don't, it's still on my books. I don't know anybody that's withstood an economic downturn and had numerous(dozens +) houses on leverage. If you come across hard times that cool $8mil you had dwindles to $5mil and your $6mil in leverage starts to become difficult to payback, whose caught?
You. With your pants down. Be smart with leverage, you don't want to end up more beholden when the goal was to be free. - 3yBryan MartinBusiness MemberAccountant · Springfield, IL · Member since 2022 · 189 posts · 100 votesInterest-only loans can be a great option for real estate investors looking to maximize cash flow in the early years of a property's ownership. The idea of increasing rents each year and using that increased cash flow as a form of equity for future investments makes sense. However, it's important to consider the long-term impact of an interest-only loan and make sure it aligns with your overall investment strategy. It's also wise to consult with a financial professional to ensure the loan structure is the best fit for your specific situation.
Quote from @John M.:
I'm trying to retrain my brain on this kind of product compared to the traditional Principal and Interest. My thought is why wouldn't I do an all interest 10 year loan at 4.99%? Prepayment penalty is only the first 3 years at a 3,2,1 rate. My thought is most of your traditional loans are mostly interest in the early years anyway so why not. This particular property has increased rents every year at 2.5% so that will be the only equity that I am building since I'm not paying down principal. The increased cash flow is a form of equity I can use/build up to keep on reinvesting. Thoughts?
- Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes3y
Yes, my current HELOC is in I/O draw mode. We are looking to renew the lease, but we have also listed the property for sale. If sold, the HELOC will be repaid, but it is not attached to that property.
Otherwise, the HELOC is I/O (draw) for another 7 years. It does not get used much, if at all, and we make regular payments to reduce the principle as well as any accrued interest. So overall, the balance is decreasing, and we are on target with the payments to having it paid off by the end of the draw period.
Otherwise, we'll probably have it refinanced and hopefully tap more equity. But we are waiting for my wife to establish her self-employment history on tax returns. So beginning next year, we can consider refinancing the HELOC.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesYou really have no clue what I'm talking about. Each paragraph above makes assumptions that are wrong.
Quote from @V.G Jason:
Quote from @Joe Villeneuve:
You're not saving equity...you're buying it. You're just transferring cash from your bank to the property. The tenant was doing that already for you...for free. When that cash was still in your bank, and if you wanted to use it, how much would it cost you to use? Nothing. If you use it, I mean spend it, to buy equity, and you want to use that equity (which was your cash), how much will it cost you now? Whatever the interest rate is at that time.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Except using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant'sQuote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
I don't view it that way.
I viewed it as saving or equity gain from "cash" that I do not need daily. In 8 10 year that money comes to me anyway and that money is useful to bring down the interest portion faster (in not-IO loan in high rate env).
But you are right also, I do have CF property that cash flow a lot with 2 something interest rate, for that house category, I do not add the principal at all.
First of 2 Golden Rules of REI is to NEVER, under any circumstances, ever, SPEND your seed money (cash). Use it to infinity, but never spend it. When you spend it, like buying equity, that you were already getting for free, you get only one use out of it. Then, it will cost you to replace it. When you use it, no matter how many times you try to spend it, it keeps coming back to you,..."with friends". In other words, you get multiple uses out of the same "cash" (seed money), and it grows each time you "use" it. This also means that the one time cost of that seed money, if you originally had to pay for it, when that cost is applied to each use (spread out), reduces the cost per use, every time you reused it (with no added cost). So, if the original cost was covered by income, the entire system makes that original cost insignificant.The golden rule of investing is to never be in position to HAVE to sell. Too much leverage puts you in that EXACT position. Leverage is a great tool, use it appropriately.
That whole notion of don't spend your cash always hold it & leverage instead, I get it. Mathematically, makes sense and logically too. But live in real life some and understand the nuances of the economy taking a downturn and you being stuck. Nobody that says that, does that at scale. They leverage and spend the cash. It's people that dream of having that kind of cash, that actually say that. Thinking that theory is beautiful in paper, but not understand living in it. It's like they have a fantasy with the fabric of the thought, and can't fathom why people don't.
Go live in it, I am in a particular position where I could keep all cash aside and just put downpayment money in and let the cash sit against the properties. I will for some, but no way would I do that for my entire portfolio. You're asking for trouble.
Say you had $8mil to invest. And use that example, most people would say go put $2mil on downpayments and be $8mil leveraged in houses. 1:1, you can always pay it off. "Other" people are paying your note, why are you? Cause smarty pants when they don't, it's still on my books. I don't know anybody that's withstood an economic downturn and had numerous(dozens +) houses on leverage. If you come across hard times that cool $8mil you had dwindles to $5mil and your $6mil in leverage starts to become difficult to payback, whose caught?
You. With your pants down. Be smart with leverage, you don't want to end up more beholden when the goal was to be free. - 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Joe Villeneuve:
You really have no clue what I'm talking about. Each paragraph above makes assumptions that are wrong.Quote from @V.G Jason:
Quote from @Joe Villeneuve:
You're not saving equity...you're buying it. You're just transferring cash from your bank to the property. The tenant was doing that already for you...for free. When that cash was still in your bank, and if you wanted to use it, how much would it cost you to use? Nothing. If you use it, I mean spend it, to buy equity, and you want to use that equity (which was your cash), how much will it cost you now? Whatever the interest rate is at that time.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Except using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant'sQuote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
I don't view it that way.
I viewed it as saving or equity gain from "cash" that I do not need daily. In 8 10 year that money comes to me anyway and that money is useful to bring down the interest portion faster (in not-IO loan in high rate env).
But you are right also, I do have CF property that cash flow a lot with 2 something interest rate, for that house category, I do not add the principal at all.
First of 2 Golden Rules of REI is to NEVER, under any circumstances, ever, SPEND your seed money (cash). Use it to infinity, but never spend it. When you spend it, like buying equity, that you were already getting for free, you get only one use out of it. Then, it will cost you to replace it. When you use it, no matter how many times you try to spend it, it keeps coming back to you,..."with friends". In other words, you get multiple uses out of the same "cash" (seed money), and it grows each time you "use" it. This also means that the one time cost of that seed money, if you originally had to pay for it, when that cost is applied to each use (spread out), reduces the cost per use, every time you reused it (with no added cost). So, if the original cost was covered by income, the entire system makes that original cost insignificant.The golden rule of investing is to never be in position to HAVE to sell. Too much leverage puts you in that EXACT position. Leverage is a great tool, use it appropriately.
That whole notion of don't spend your cash always hold it & leverage instead, I get it. Mathematically, makes sense and logically too. But live in real life some and understand the nuances of the economy taking a downturn and you being stuck. Nobody that says that, does that at scale. They leverage and spend the cash. It's people that dream of having that kind of cash, that actually say that. Thinking that theory is beautiful in paper, but not understand living in it. It's like they have a fantasy with the fabric of the thought, and can't fathom why people don't.
Go live in it, I am in a particular position where I could keep all cash aside and just put downpayment money in and let the cash sit against the properties. I will for some, but no way would I do that for my entire portfolio. You're asking for trouble.
Say you had $8mil to invest. And use that example, most people would say go put $2mil on downpayments and be $8mil leveraged in houses. 1:1, you can always pay it off. "Other" people are paying your note, why are you? Cause smarty pants when they don't, it's still on my books. I don't know anybody that's withstood an economic downturn and had numerous(dozens +) houses on leverage. If you come across hard times that cool $8mil you had dwindles to $5mil and your $6mil in leverage starts to become difficult to payback, whose caught?
You. With your pants down. Be smart with leverage, you don't want to end up more beholden when the goal was to be free.You have no clue what I'm talking about either. It's probably best you be able to play at this level, before you throw your two cents. You're an arm chair expert REI telling people to always be leveraged, keep that cash aside against it. I'm doubting you follow your own nonsense. If you did, you're either broke and talking in that angle or just not fit to really do anything significant anymore. Keep your two cents, you probably need it.
- 3yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
Couple questions:
1. Assuming we have moved to a permanent 7% inflation position from 2021 And your interest rate is 4%. Whether I/O or P/I, life's great I'm paying off debt and interest with cheaper dollars. Especially the principal the further out it is paid.
2. What is the downpayment on an I/O loan. 25%? Or is it required to be higher?
3. 10 year term. On an I/O loan is there a call option from the banks standpoint? This would only matter if the overall valuations went down and you had to get a new appraisal. Due to refi.
@John M. what are typical loan terms for an I/O loan regarding a bank calling on the note or requiring a new appraisal?
Thanks
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesMore assumptions that are wrong. At least you're consistent.
Quote from @V.G Jason:
Quote from @Joe Villeneuve:
You really have no clue what I'm talking about. Each paragraph above makes assumptions that are wrong.Quote from @V.G Jason:
Quote from @Joe Villeneuve:
You're not saving equity...you're buying it. You're just transferring cash from your bank to the property. The tenant was doing that already for you...for free. When that cash was still in your bank, and if you wanted to use it, how much would it cost you to use? Nothing. If you use it, I mean spend it, to buy equity, and you want to use that equity (which was your cash), how much will it cost you now? Whatever the interest rate is at that time.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Except using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant'sQuote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
I don't view it that way.
I viewed it as saving or equity gain from "cash" that I do not need daily. In 8 10 year that money comes to me anyway and that money is useful to bring down the interest portion faster (in not-IO loan in high rate env).
But you are right also, I do have CF property that cash flow a lot with 2 something interest rate, for that house category, I do not add the principal at all.
First of 2 Golden Rules of REI is to NEVER, under any circumstances, ever, SPEND your seed money (cash). Use it to infinity, but never spend it. When you spend it, like buying equity, that you were already getting for free, you get only one use out of it. Then, it will cost you to replace it. When you use it, no matter how many times you try to spend it, it keeps coming back to you,..."with friends". In other words, you get multiple uses out of the same "cash" (seed money), and it grows each time you "use" it. This also means that the one time cost of that seed money, if you originally had to pay for it, when that cost is applied to each use (spread out), reduces the cost per use, every time you reused it (with no added cost). So, if the original cost was covered by income, the entire system makes that original cost insignificant.The golden rule of investing is to never be in position to HAVE to sell. Too much leverage puts you in that EXACT position. Leverage is a great tool, use it appropriately.
That whole notion of don't spend your cash always hold it & leverage instead, I get it. Mathematically, makes sense and logically too. But live in real life some and understand the nuances of the economy taking a downturn and you being stuck. Nobody that says that, does that at scale. They leverage and spend the cash. It's people that dream of having that kind of cash, that actually say that. Thinking that theory is beautiful in paper, but not understand living in it. It's like they have a fantasy with the fabric of the thought, and can't fathom why people don't.
Go live in it, I am in a particular position where I could keep all cash aside and just put downpayment money in and let the cash sit against the properties. I will for some, but no way would I do that for my entire portfolio. You're asking for trouble.
Say you had $8mil to invest. And use that example, most people would say go put $2mil on downpayments and be $8mil leveraged in houses. 1:1, you can always pay it off. "Other" people are paying your note, why are you? Cause smarty pants when they don't, it's still on my books. I don't know anybody that's withstood an economic downturn and had numerous(dozens +) houses on leverage. If you come across hard times that cool $8mil you had dwindles to $5mil and your $6mil in leverage starts to become difficult to payback, whose caught?
You. With your pants down. Be smart with leverage, you don't want to end up more beholden when the goal was to be free.You have no clue what I'm talking about either. It's probably best you be able to play at this level, before you throw your two cents. You're an arm chair expert REI telling people to always be leveraged, keep that cash aside against it. I'm doubting you follow your own nonsense. If you did, you're either broke and talking in that angle or just not fit to really do anything significant anymore. Keep your two cents, you probably need it.
- 3yJohn M.Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 798 votesOP
@Henry Clark 25% equity/down payment for a refi with a 10 year note and a balloon at the end. 4.99% IO locked for 10 years and a 25 year amortization. I don't think there is any recall or other surprises but I will let you know. If I were to go with a traditional loan they would only do a 5 year term. I would have to go through an appraisal, renewal fees, and a 20 year am in year 5 not to mention pay principal. There is some additional savings here by going out longer before I had to refi again.
- Rental Property Investor · Member since 2018 · 826 posts · 810 votes3yI agree with Joe on this thread. It’s straight math and people are mixing up leverage and reserves. I love IO products, I maximize loan leverage, I buy in high cost locations, and I also maintain healthy reserves - they are not mutually exclusive.
Quote from @V.G Jason:
Quote from @Joe Villeneuve:
You really have no clue what I'm talking about. Each paragraph above makes assumptions that are wrong.Quote from @V.G Jason:
Quote from @Joe Villeneuve:
You're not saving equity...you're buying it. You're just transferring cash from your bank to the property. The tenant was doing that already for you...for free. When that cash was still in your bank, and if you wanted to use it, how much would it cost you to use? Nothing. If you use it, I mean spend it, to buy equity, and you want to use that equity (which was your cash), how much will it cost you now? Whatever the interest rate is at that time.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Except using your money to pay off your principle is doing the exact opposite. All it does is add to your cost. Your tenant is making those payments for you already, with their money. The only cost to a REI on their property is the cash that comes out of their pocket. Taking your cash and adding it to the mix of payoff, is just adding to your cost. Your substituting your cash for your tenant'sQuote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Why would you pay it off faster?Quote from @Carlos Ptriawan:
Quote from @Allan C.:
@John McKee I have found 30 year IO products and think they are great. Most people who dislike IO are not account for Net Present Value of money.
Let’s say hypothetically your goal is to have a property fully paid off in 30 years. I would rather pay the full principal at one time in year 30 instead of monthly over 30 years. Doesn’t matter if the principal is $100k or $1M, as an investor i would like to think my opportunity cost of growing that capital will beat the loan interest rate.
This also shows the value of developing a strategy - you can define your end goal and the best path to reach it.
yeah, and I can payoff 30YFRM in 10 years too. Even with IO. The key is appreciation.
to make money
I don't view it that way.
I viewed it as saving or equity gain from "cash" that I do not need daily. In 8 10 year that money comes to me anyway and that money is useful to bring down the interest portion faster (in not-IO loan in high rate env).
But you are right also, I do have CF property that cash flow a lot with 2 something interest rate, for that house category, I do not add the principal at all.
First of 2 Golden Rules of REI is to NEVER, under any circumstances, ever, SPEND your seed money (cash). Use it to infinity, but never spend it. When you spend it, like buying equity, that you were already getting for free, you get only one use out of it. Then, it will cost you to replace it. When you use it, no matter how many times you try to spend it, it keeps coming back to you,..."with friends". In other words, you get multiple uses out of the same "cash" (seed money), and it grows each time you "use" it. This also means that the one time cost of that seed money, if you originally had to pay for it, when that cost is applied to each use (spread out), reduces the cost per use, every time you reused it (with no added cost). So, if the original cost was covered by income, the entire system makes that original cost insignificant.The golden rule of investing is to never be in position to HAVE to sell. Too much leverage puts you in that EXACT position. Leverage is a great tool, use it appropriately.
That whole notion of don't spend your cash always hold it & leverage instead, I get it. Mathematically, makes sense and logically too. But live in real life some and understand the nuances of the economy taking a downturn and you being stuck. Nobody that says that, does that at scale. They leverage and spend the cash. It's people that dream of having that kind of cash, that actually say that. Thinking that theory is beautiful in paper, but not understand living in it. It's like they have a fantasy with the fabric of the thought, and can't fathom why people don't.
Go live in it, I am in a particular position where I could keep all cash aside and just put downpayment money in and let the cash sit against the properties. I will for some, but no way would I do that for my entire portfolio. You're asking for trouble.
Say you had $8mil to invest. And use that example, most people would say go put $2mil on downpayments and be $8mil leveraged in houses. 1:1, you can always pay it off. "Other" people are paying your note, why are you? Cause smarty pants when they don't, it's still on my books. I don't know anybody that's withstood an economic downturn and had numerous(dozens +) houses on leverage. If you come across hard times that cool $8mil you had dwindles to $5mil and your $6mil in leverage starts to become difficult to payback, whose caught?
You. With your pants down. Be smart with leverage, you don't want to end up more beholden when the goal was to be free.You have no clue what I'm talking about either. It's probably best you be able to play at this level, before you throw your two cents. You're an arm chair expert REI telling people to always be leveraged, keep that cash aside against it. I'm doubting you follow your own nonsense. If you did, you're either broke and talking in that angle or just not fit to really do anything significant anymore. Keep your two cents, you probably need it.
So here’s the scenario using simple numbers: if I obtain a $100k IO loan with 30 year tenure, I avoid $3k average annual principal payments ($1k in early years and $7k in later years) vs a 30 yr FRM. Using 4% T-bills as the opportunity cost, that’s $165k income I can generate over 30 years. In 30 yrs I can pay off the full $100k loan and have an extra $65k.
You are effectively no further leveraged in IO scenario than the 30yr amortized, and the extra cash flow you have with IO gives you more reserves. Furthermore you have $65k more cash once the loan is paid off (though NPV is immaterial). The obvious caveat is that you need to place your hypothetical principal payments into investments that have yields > 0%.
Even if you replaced the $100k with a $1M loan the fundamentals remain the same. The OP was pondering opportunity cost, and we’ve provided him with options that don’t materially increase his exposure.
I’m also not putting hypotheticals scenarios out there that I don’t follow. I have long tenure IO loans, but use T-bill and bond ladders to maintain liquidity/reserves. Why have dead money sitting as illiquid equity when that same money can provide yield and be accessed easier?
- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
Interest-only loans are a great product for Real Estate investors looking to maximize their returns over the long term. This type of loan can help improve cash flow numbers significantly, making more options available when assessing a potential investment. I suggest opting for interest-only loans with longer terms such as 10 years or more. Over this period, rents should increase and add value to the building far beyond any principal reduction that would have been achieved in the short run. For shorter duration loans - usually 3 years - caution needs to be taken into account as rents may not be increasing due to cooling off of Real Estate markets and lending standards becoming stricter, which could make refinancing challenging.
- Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes3y
OK but paying interest-only for 30 years on (for example) a $100K loan at 5% you will pay total interest of $148,980. Amortized over 30 years you would pay only $93,255 in interest. Seems you're not really coming out ahead by all that much + you are increasing the likelihood of a default by carrying a high mortgage balance over the entire period of time.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.