3-2-1 Buy Down

[Jerry Zigounakis]

What is everyone's thoughts on 3-2-1 Buy Down. I'm in the process of purchasing a STR and am intrigued by the 3-2-1 buy down. 1st year of the loan would be 4.5%, 2nd year 5.5%, 3rd year 6.5%, 4th year standard market rate. The hope would be to refi after the 1st or 2nd year if rates dropped.

[Greg Scott]

Loans like this can be useful or very dangerous, depending on how you manage your business.

The ideal situation for a loan like this is when you have a property that will take a while to get up and running.  When revenue is low in the first couple of year, so is the interest payment.  People that get destroyed are ones that are enticed by the low interest rate and assume they can refi after the second year.  But here is the rub, what if you can't?  Or, what if the new interest rate is even higher and you are stuck at 6.5%?  This is how a lot of people lost houses in the GFC.

Only get in this loan if the property cashflows at the 6.5% interest.