Opinions on IO?

Question

BiggerPockets!!!

Today, I'm studying creative financing! As a general investing concept, and as a newbie who has little capital to invest anyway, I have become a huge proponent of putting as little of your personal wealth into a deal as possible. One of the best ways to do this is with seller-financing, and that has led me down an entire rabbit hole of 'interest only payments'. What a strange concept, I thought.

But in my research I am now wondering what some experts might think about.....what I'm thinking....

Ok, so if I finance a conventional mortgage (conventional as in amortizing), the principle adds a substantial amount of cost to my monthly payment. What do I get for this? Equity of course! I get equity as I pay down my loan. Basically, I'm trading $300-$500 per month for this benefit. Naturally the other benefit is owing less principle.

But, lenders want interest first, principle later. It will take YEAAAARS to gain any real traction with the equity I get from principle paydown. Even if you buy in an area that is going to appreciate well, principle paydown never really accounts for even a quarter of your capital gains, and that's if you carry the whole 30 year note for the whole 30 years. And then there's the whole debt situation. If in 15 years I still owe $220,000 on a $300,000 loan, is that really less scary than still owing $300K?? Meanwhile I'm having to add several hundred dollars to my monthly expenses for the purpose of 'principle paydown'.

Principle paydown PALES in comparison to appreciation. So is it worth the 3-500 dollar hit every month? That money could instead end up in my pocket, opening up a lot more space for cash flow, and allowing me to put more money into more investments.

I am going to hold the property for 10-15 years anyway, and unless I'm really bad at homework, the property is going to double in value during that time, allowing me to easily pay off the loan.

The risk that I DO understand is that, if there's no paydown, you're taking the risk of the property not appreciating enough. But we're talking about 30 year notes here people. When has the value of real estate been flat or depreciated over the course of 30 years? From what I've learned so far, IO financing seems like a killer deal that opens up a world of opportunity for wealth building.

Thoughts?

Travis Timmons · Answer

The sad reality about creative financing is that it is a great tool for investors that already have a pile of cash. If you don't have enough liquidity, creative finance usually means that you are overpaying and hoping that everything goes right for 3-5 years.

The disappointing answer to "Is IO a good idea?" is like everything else - it depends. If you need interest only to get by because you are operating on razor thin margins without proper reserves, it's a bad idea that is easy to talk yourself into. I look at it as a way to limit carrying costs on a short-ish term deal until I can sell or refinance into long term, fixed rate debt.

Carini Rochester · Answer

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I don't know who will offer you an interest only loan. My strategy, when I want to get my principle back out of a property is to refinance, which involves paying the bank significant fees. Some investors love paying off their mortgages so that once paid off results in really good cash flow. Others want to keep properties leveraged and improve on return on investment and on return on equity. Even my one owner financed deal, the previous owner wants his money each month, interest and principle.

J Castro · Answer

Hey @Ethan Whaley, welcome to BP!

Great topic — opinions on interest-only (IO) loans
are mixed, and they really depend on your goals, experience, and risk tolerance. You’re absolutely right, interest-only financing can seem like a killer deal, especially for investors who know how to leverage it strategically.

Interest-only (IO) loans can look like a dream come true—low monthly payments and more cash flow to play with. And for savvy investors, they can be a game-changer.     - Cash flow advantage: Lower monthly payments mean more liquidity for other investments or property improvements.     - Flexibility: They give investors breathing room early in a project—especially for fix-and-flip or value-add strategies.     - Wealth acceleration: When used strategically, they let you leverage capital to grow your portfolio faster.

However, the flip side is that once the IO period ends, payments rise sharply when principal repayment begins. So it works best when paired with a clear exit or growth plan. Which is why, there are other investors and many experts who caution against them.

- No principal reduction: You don’t build equity through payments during the IO period—only through appreciation.     - Payment shock risk: Once the IO period ends, your payments jump when principal repayment begins.     - Market sensitivity: If property values fall or refinance options dry up, you could be left exposed.

I personally believe interest-only financing is a powerful tool for experienced investors who have a clear plan, solid exit strategy, and disciplined cash management. Used wisely, it can supercharge your wealth-building potential. Used carelessly, it can lead to trouble when the market shifts and for long-term homeowners or those without a backup plan, it can become risky once the IO period ends. Make sure to carefully analyze your deals and always have an exit strategy in place.

Nicholas L. · Answer

@Ethan Whaley

can you help us understand a little better what your specific question is?

i certainly agree with the first part of your post - leaving as little as possible in each deal.  that's why I BRRRR when I can.  but after that, the interest rate just isn't that big a deal - it's not something my investments turn on.  if you shell out a huge down payment with no way to get it back, it doesn't really matter whether your rate is 6.5 or 2.5 - that capital is trapped equity at least for a while.

and it sounds like you might be saying principal paydown isn't powerful... but it is, over the long term, which is why i am in this.

but maybe i'm not understanding your post.

happy to dialogue further

Ethan Whaley · Answer

Right! loans are paid off with my cash. And the more cash I keep, the more of the loan I will eventually have to pay off with my equity when I sell.

And the majority of my equity will always come from appreciation. The downside to keeping more cash, is keeping more debt. The risk is, will it appreciate enough to make up the difference compared to adding principle to the finance? My point was, the difference is small enough within the first 20 yrs of a 30 yr term to strongly consider that risk.

BUT, very few people seem to take the risk of IO payments, which makes me wonder what I'm missing.

Nicholas L. · Answer

@Ethan Whaley

i still can't tell if we're saying the same thing here, but principal paydown can definitely be more powerful than appreciation (although ideally you get both.)

for example, i have a low rate on my primary residence, and so i'm already - just a couple years in to the loan - paying off large amounts of principal every month.  if appreciation is low over the next few years, which i expect it to be, there will be way more value in the principal paydown.

you also said "Loans are paid off with equity gained through appreciation" - i don't think i understand what you mean by that.  loans are paid off with cash.  that cash can come from your bank account, your tenant, or your uncle, but it has to be cash.  if you property goes up 10% in value - the loan value stays the same.  if it goes down 20% - the loan value stays the same.

but again - you might be making a different point.

Ethan Whaley · Answer

My point was that principle paydown is not powerful when compared to appreciation. Loans are paid off with equity gained through appreciation; paydown accounts for a small portion. If the strategy is to minimize payments with a long term loan, but pay it off by the 15 yr mark, is it worth the risk of holding all that debt for even lower monthly payments, and therefore even higher monthly income? I guess technically, it's speculating.

Another thing I didn't account for was that IO is usually short term, and after 3-5 yrs the payments start amortizing at 15 yr terms. At best. This completely offsets my perceived cost savings from the initial IO terms, unless the seller agreed to 2-3% interest for the amortizing portion of the deal...

So it seems that unless you find a great flip, or have a lot to put down and also want to bypass the time and money for closing costs, my IO idea is poop fart.

I love it when I realize I actually don't know anything.

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