Interest only loans?

8 Replies

@Andrew Ralston , PLOCs, yes, HELOCs, no, my business partner has that experience. He took out an interest only HELOC and was able to purchase his first 3 properties with that HELOC.

Not loans, lines of credit, one is a personal line of credit not backed by collateral, the other is backed by your residence.

I posted this in part of a response to another thread, however it is relevant here so I will repeat the relevant portion  

I will explain what options I have found and how I intend to use them. My investing strategy is essentially the basic brrrr. I buy a house that needs rehab with hard money, then refinance. However I am currently looking into refinancing with what is called a portfolio loan (balance sheet, not blanket). This is because my parter, who is providing the capital, is retired and has no income but a lot of asset accounts. So the portfolio loan allows us to qualify based on assets rather than income. This also means we can buy in an LLC which we preferred for our particular strategy. The portfolio loans do come with a slightly higher interest rate, currently around 6%, but have flexibility in areas such as interest only periods. For example, one of my hard money lenders also offers portfolio lending for the refinance at a 6% rate which can include up to 5 years IO with a prepay penalty of 5% in year 1 and 1% less each year until year 5 when it becomes a standard loan essentially.

So the question is then, when does it make sense to use the IO option? For me this is a matter of strategy. In my current deals we are focusing on building up cash flow to reinvest as quickly as possible over the next few years. According to my modeling that will provide the best 10 yr return on investment and meet the goals of my parter and I both. So we are using the interest only option on deals that make sense for it, getting a nice boost to cash flow, while keeping in mind that our return on sale when we sell in five years as planned will be much lower with none of the principal having been paid down. Because we will be 1031 exchanging into a new property to basically reset tax liability and enter a new IO loan rather than banking on a big profit at sale, this works for us. Because of the time value of money, we prefer to get bigger returns now in exchange for less in 5 years.

This is just one example of the many IO loans and credit out there, but it’s one that I think can be useful with the brrrr strategy when used wisely.