Interest-only long-term financing: Does it make sense to you?
I've been approached by an Albuquerque investor who is willing to offer interest-only financing for long-term, buy-and-hold, projects in New Mexico and surrounding states. What is your opinion of it? Would it make sense for any of your deals? I'm not sure it would help me if I'm comparing it to 4.25%, 25-year bank financing that I've been quoted recently for an apartment building. But it has some other attractive features:
Details:
- Minimum loan: $100,000; Maximum loan: $2M
- Maximum LTV: 80% of purchase price (seller can carry 2nd position for up to 20%, so zero-down loan is possible)
- 2+ unit or commercial properties only; no owner-occupied
- 4% interest-only for 12 mos., followed by 8% interest-only for up to 9 additional years.
- 2% origination fee
- 3% pre-payment penalty if paid off in years 0-5; no prepayment penalty in years 6-10.
When I do the math, the required monthly payment at 8% interest-only is about the same as 5.25% financing amortized for 20 years...sort of a typical local bank rate for commercial property. Of course, during Year 1, the monthly payment would be half that, and that is pretty much unbeatable. The zero-down option and low origination fee are also attractive.
Feedback?