Getting creative with buying rentals. Interest only? ARMs?

Question

These new rates are killing cashflow potential in most areas I'm looking so been thinking about breaking away from conventional mortgages. Having never done interest only or ARMs what are the benefits to going this route on long term buy and hold rentals? I can see the positives with STR/AirBnB but maybe I'm missing something with these loans on LTRs? Anyone going in this direction?

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Brandon Beardt · Answer

Hi Bernard,

Great questions and great post! From reading your initial post and reply, it sounds like the you're looking for non-conventional financing options that would allow the property you're trying to purchase to cash flow. If that's the case, we've had experience with lenders that offer 30 year interest only fixed and even 40 year fixed rate options. These programs are designed for RE investors in the exact position you are in, as they help lower the monthly payments to allow the property DSCR (cashflow). With these programs, the rates are higher than conventional financing, but as long as the projected monthly rent exceeds the projected PITI, you qualify! The lender wouldn't need to ever look at any income verification documents. Hope this helps out in someway shape or form. Best of luck to you and don't hesitate to reach out if you have any questions!

Kevin Romines · Answer

Short of the best rate you can get on conventional using discount points to buy down the rate, then next best strategy would be to look at a 40 year fixed with the 1st 10 years being interest only. Look at your area's historical appreciation rates, so long as you have a history of solid annual appreciation then you may make that work, may being the key word? There is no silver bullet in this scenario, only the best options available. But keep in mind that when rates drop, and they will within 1-3 years is our projection, you can then refinance to a better rate.

I would also look at rents in your area. Typically you see times of appreciation and times of stagnation, its rare to see rents going backwards, but it can happen in some areas at some times? Once armed with past statistics, you can get a better sense of what is likely to happen going forward, but not guaranteed?

I hope this helps?

Timothy Hero · Answer

If you're getting away from conventional due to rates, the private/DSCR side is about to surprise you. My top tier borrowers are being quoted high 6's.

Bernard Joseph S. · Answer

Thank you for the responses everyone, both in private and on the open forum. Main reason to explore different options besides just rates was the fact that i took an early retirement and am not showing any income right now. Have plenty cash on hand and a high FICO but I'm in need of no doc loans. Wife is on a couple of our other mortgages so I wanted to grab a few rentals on my own and keep her DTI respectable. We look at the big picture and believe this is the way right now.

Erik Estrada · Answer

@Jon Kelly How would this strategy work? I am having trouble understanding how an ARM would make sense. I would think that an investor looking not to worry about an adjustment period for a long term rental would prefer a 40 yr fixed rate. You can still do a cash-out refi with this option, have lower monthly payments, and not have to worry about the adjustment period.

Jon Kelly · Answer

@Bernard J. I disagree with the other post. If you're going to stay small and purchase 2-3 properties and wait 30-40 years to pay them off then avoid ARMs or interest only options.

The reality for more experienced investors is they will sell or refinance their property well before 30-40 years to capture the built up equity from mortgage paydown or appreciation. In this case, ARMs and interest only loans can be your friend. They will keep your monthly payments low in the interest only option or while they are fixed. Most ARMs are fixed for a length of time and then become adjustable. For example, most ARMs are 5/6, 7/6, 10/6, etc. 5/6 means they are fixed for 5 years and then adjustable every 6 months afterwards.

Erik Estrada · Answer

I wouldn't see how an ARM could work on a longterm rental since the rate adjusts. They are typically used for the short-term. The Interest only could be an alternative but it depends on your situation. Many have balloons so you would have to refinance out of it. There are 40 yr fixed rates available if you are looking for a low monthly payment.

Getting creative with buying rentals. Interest only? ARMs?

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