Interest-Only Loan to Improve Cash Flow — Good Idea?

[Charles Barker]

I'm currently working on my first slow BRRRR. We're renovating the property now, and I plan to live in it for a few years before moving into another property and turning this one into a rental.

My bank recently told me I only have around $130,000 left in buying power for a standard 30-year conventional mortgage, which doesn’t go very far in my market. 

Because of that, I’ve been looking into a 10-year interest-only loan that converts into a 20-year principal + interest loan afterward. I wanted to get everyone’s thoughts on whether this strategy makes sense or if I’m overlooking something.

Here’s an example:

Interest-Only Loan (10 years IO / 20 years principal + interest)

• Purchase Price: $280,000
• Loan Amount: $210,000
• Down Payment: 25%
• Interest Rate: 6.87% (half a point higher than 30 year conventional)
• Monthly Payment (first 10 years): about $1,202

30-Year Conventional Loan

• Purchase Price: $280,000
• Loan Amount: $210,000
• Down Payment: 25%
• Interest Rate: 6.37%
• Monthly Payment: about $1,309

The reason I’m considering the interest-only loan is because the lower payment would help properties either break even or cash flow slightly in a difficult rental market. Even though the savings are only around $107/month, that can make a big difference when acquiring great assets.

My thought process is:

• Buy in strong appreciation areas today
• Keep payments lower during the first 10 years
• Benefit from appreciation and rent growth over time
• Refinance before the interest-only period ends
• Ideally refinance into a lower rate later when values and rents are higher

This seems like a way to buy properties now while keeping monthly payments manageable, but I’d love to hear from people who have used interest-only loans before.

The only risk that I could see is if rates continue to climb or if property home value drops significantly which I believe both are pretty unrealistic. 

Am I missing any major risks with this strategy?