40 year mortgage option

[Michael A.]

I’ve been researching alternative financing options for my second property. I have seen that New American Funding, Newfi, and Griffin Funding have a 40 year mortgage with the first 10 years being interest only while the remaining 30 years are a fixed rate. I’m located in Austin and a loan option such as this one sounds attractive in this highly appreciating market. I understand the opposition towards this type of loan product but I feel that this option is good for folks like myself who are limited on funds but would like to invest in RE for the long term. Having the extra money the first 10 years will help us stabilize until we’re ready to rent out the house and will give us the opportunity to perhaps save for another property instead of parking money in the house itself. If the interest rate is in fact fixed after the initial 10 years, does anyone know if the rate will be predetermined prior to closing on this 40 year loan? Or will the interest rate be determined later in the future? I’m wondering if I could perhaps secure today’s rates despite this being a hybrid type of loan. I have no plans of selling within the next ten years and will likely pass this on to my children . If anyone has any additional info about such loan products in the Austin area please kindly share any details you might have. Also, I’d love to hear what others have to say about such option whether they are in Texas or beyond. Thank you in advance.  

[Joe Villeneuve]

Originally posted by @Dan Heuschele:

Originally posted by @Joe Villeneuve:

Deals are made...not found.  Deals are deals because of two components:

1 - Minimal cost to the REI. This isn't the purchase price. It's the cash that comes out of you pocket. This should be restricted to only the DP. Negative CF adds to your cost. I would never buy a property with negative CF. What's the point?

If a market has negative CF, I won't invest in that market.  It's just that simple.  There are too many markets the do cash flow...big time CF too.

2 - The Terms for how someone/something else pays for the rest of the property cost.

Even areas where it looks like there is no chance to get positive CF at the start, there could be ways to make that happen.  All you need to do is learn real strategies, invest in the correct market, and have a plan based on a series of connected financial steps to achieve your specific financial goals.

Like I said in the first statement above.  Deals are made, not found.  Deals are made from opportunities found, where you use the correct strategy to make that deal happen.

 >Negative CF adds to your cost

True.  The negative cash flow should be treated as additional cost. 

>I would never buy a property with negative CF. What's the point?

I can understand avoiding negative cash flow in some/many markets.  However, markets vary and have different criteria.  I have never purchased a property that projected cash flow negative, but I would not be adverse to doing so for the right property.  I have purchased properties that projected about cash neutral with my pro forma that projects all expenses.

In my market I have purchased with bad timing (properties that fell in value approaching 20%) and great timing.  My worse appreciating property has appreciated $2700/month over its long hold.  Best appreciating is tougher to identify.  I have a property that has appreciated over $20k/month over its 12 month hold (not including the almost $200k value add) and another property that has appreciated over $7k/month over a long term hold. 

Needless to say this appreciation far surpasses even horrendous negative cash flow and have produced outstanding return.

RE markets vary in what constitutes a good purchase.  My definition is that it has to produce outstanding return over the hold period.  I do not care if the return comes from cash flow, appreciation, or value add (I will say value adds usually involve more effort and I have come to appreciate more passive options). To judge a property just on cash flow could result in passing up some great RE investments.  

The criteria of a good purchase varies by market.  If cash flow was the only criteria investors would not purchase in areas like Austin of San Diego.  Case Shiller lists the 3 markets with highest return for buy and hold for this century as San Francisco, Los Angeles, and San Diego.  Note if you were choosing a market for cash flow, you would not be choosing those markets.  

Good luck

 I never combine appreciation and cash flow.  I treat them as separate returns with a common lead, but two very different exits.

Cash Flow:  Liquid.  My money.  I pay in the "now".  Each individual "exit" depends on events I can see...right now.  The initial role of CF is the payback of my cost (DP = Cash out of Pocket).  The immediate role of equity is the use of the cash to pay off monthly bills.

Equity:  Frozen money, virtual money.  Not my money.  I own the property, the property owns the equity.  Not the same thing.  The initial role of the equity (DP)_ is what it buys me...which is Property Value.  There is no immediate role since it doesn't really exist until it becomes liquid.  The future value is what it can buy me when converted to cash/liquid (going back to the initial value...but with a larger amount).

As equity grows in the same property due to appreciation, its buying power is reduced with each step of growth.  The value of the equity as a factor of the Value of the property it's in, is reduced.  To regain full value of the equity, it must be converted to liquid...and moved.

If a $100k property ($20k/20% DP) appreciates 10% each year for the next 2 years, the new PV = $121k, and the equity = $41k.  Sounds like a great increase in profit.  If the equity continues to grow at that same rate over the next 2 years, the new PV = $146k and the equity = $66k.  Now we're really cookin'.

However, if the property was sold at the end of the first two years, that now liquid equity can be reinvested in two properties like the one it came out of ($100k PV, $20k.20% DP).  This would immediately put the new PV = $200k...with the same equity. *

Repeat the process again two years later, and the new PV = $400k, with $80k+ in equity.  That great appreciation plays a role here too, but by moving the equity as it grows, the buying power of it is maximized, instead of held back, and in the end still ends up with better numbers than staying in the same property.

Also, at that 4 year mark, how many properties would you have appreciating at the same time?  Then, how many Cash Flows come along with it?  Meanwhile, staying with just the one property, the answer to these two questions is the same for both...1.

It's the power of compounding.