Opinions on IO?

[Ethan Whaley]

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?