Have Our Post Delivered to Your Inbox!

Enter your email address:

7 Reasons To Use Pay Option ARMs To Finance Your Investment Property.

Wednesday, March 5, 2008

Have you heard about all the bad press about Smart Loans and all the other kinds of loans that contains negative amortization? Much of it is deserved! This loan is a tool and just like any tool, there is a correct way to use it and a wrong way!

Most people that get Pay Option ARMs do it simply to get a lower payment on the house that they live in. They couldn’t afford it any other way. They finance the house to the hilt and suddenly they get upside down when that balance starts to increase!

Smart Loans are a good choice when your home is experiencing steady appreciation (5% or more) because this type of mortgage has the ability for negative amortization (the loan balance can actually increase throughout its history). In this situation, the rate of appreciation will simply out pace any increase in the loan balance.

Cash Flow ARMs are good for houses that you are financing under 90% of the value or purchase price. In quickly appreciating housing markets you can get away with a higher amount but leaving a 10% equity cushion in the home is bare minimum. Why? Well, ff you get rid of the home via normal channels, your selling expenses could be anywhere from 9-15% of the sales price! No one enjoys the idea of having to come out of pocket to get rid of a house! You want to earn money!

Real estate investors can find some of the biggest benefits in using pay option arms. When you take a property that fits some of the criteria mentioned previously, using pay options will afford you the following:

1. Payment Flexibility – Just as the name of the loan states, you have different payment options. One, you have a payment based on the beggining interest rate of the loan (which could be as low as 1% or less!). Two, you have the interest only payment. Three, there is the choice to pay based on a 30 year amortization term. Lastly, the fourth pay option is calculated on a 15 year term. The last 2 pay options allow you to pay down the loan principle if you choose.

2. Maximize Cash Flow – Cash flow is the name of the game when dealing with buy and hold property and pay option ARMs are one of the best methods to increase it. Used correctly, cash flow ARMs can DOUBLE the income on your rental property!

3. Minimize The Cost Of Vacancies - Anyone who owns investment property has had vacancies. If you haven’t yet, just wait you will! One single month of vacancy, property dependent, will nearly wipe out the cash flow for nearly a year! Don’t believe me? Go ahead and tally up the holding expense for carrying the loan, utilites, cleaning, and a little maintenance and repair and see what you get. If you had a way to reduce the biggest expense, the mortgage, by a third, wouldn’t that ease the pain? Again, pay option ARMs are the answer!

4. Stop worrying about unexpected maintenance costs – In the same line as the vacancy example, you will be better positioned to minimize the effects of an unexpected repair because your revenue has increased two-fold.

5. Give incentives to residents for good "deeds" – You can be very creative here. Credit for getting the lease payment to you before the beginning of the month (for instance, payment by the 25th). Reduce rent on longer term leases such as an 18-24 month lease, etc. The extra revenue from using a cash flow ARM can smooth out you turn over and give you ability to assist you with tenant retention, particularly in a renters market!

6. Use the house to get rid of personal debt – If your cash flow from getting a pay option ARM increases from $250 to $500 a month, you can use that extra money to consolidate your car, credit cards, student loans, whatever.

7. Save the extra income to buy more property! – Better yet, start saving that extra cash flow to buy more property! You will use pay option arms, collect more cash flow and use that to buy even more property! Then your business feeds off of itself without you having to use your salary for your 9 to 5 to fund it!

0 comments: