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

Question

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?

Ryan Thomson · Answer

The IO vs conventional comparison misses a bigger question: why are you buying at 6.87% at all if your goal is cash flow?

Here's the real math on your example. IO at 6.87% = $1,202/month for 10 years. Then it resets to 20-year amortization on whatever balance is left (still $210K since you built zero equity) and your payment jumps to around $1,570/month. You've bought yourself a 10-year window at lower payments, but you're paying more than a standard 30-year loan in years 11-30, and you own zero equity at year 10.

The conventional is actually the better loan here: $210K at 6.375% = $1,311/month, but you're building equity the whole time.

the real move to consider is an assumable FHA or VA loan. Right now there are active listings with 3-4% rate assumptions in most markets. Same $210K at 3.25% = $913/month. That's $289-399/month better than your IO payment, and you're building equity. It's not zero-down, but with 5-10% down instead of 25%, you can stretch your buying power further.

If you need cash flow, the rate is the lever. IO doesn't fix the rate problem, it just defers it.

Caleb Brown · Answer

I don't love that idea. Have you calculated what you'll be paying in interest in those 10 years? Seems like a lot to give away without any principal being paid down. $100 is not enough to make me go to an interest only loan

Andrey Shostak · Answer

Total interest paid with the conventional loan is $261,398.44, and total interest paid with the 10-year IO is $321,097.52.

Also, the monthly payment on the IO will jump from $1,202.25 to $1,611.78 for years 11+.

Those numbers show the benefit of the half-point lower interest rate and longer amortization of the conventional loan. Are the downsides of the IO worth an extra $107 per month now? Would that money really make a difference? Up to you to decide.

I would tend to prefer the lower interest rate, and the better exit options from building equity faster on the conventional loan.

Erik Estrada · Answer

The interest-only loan works well for rental properties that are very tight in cashflow. The drawback is if the property is located in a slow appreciating state, you might be stuck in the same position.. If you can increase rent gradually overtime, check to see if you can pay down the principal balance without any added penalty. Some of these loans do carry prepayment penalties.

Jake Yuskaitis · Answer

it's a trade off. have to think if it's worth it for you. in my opinion, I would generally avoid this.

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

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