Cash flow VS. equity build up

[Aran Shinaar]

Hi everyone,

I bought a few months ago a property in Atlanta GA (full payment) and now I plan to purchase another one in north England  that will require financing.

I have put down 25% of the property purchase price (total of 92,000 GBP, the project is under construction) and have two options at hand:

1. Ask for a regular 8-years bank loan and have a 5,000 ILS monthly payment (I'm from Israel, but feel free to refer it as USD). Assuming the Atlanta property will run smoothly, I'll have roughly 500$ monthly (after expenses) which translates to ~1,800 ILS. After 6 month of building an emergency fund for the UK property, I'll use that also to cover part of the debt. I expect 400 GBP which translates, currently, to ~2,000 ILS. That means that I'll have a negative cash flow that will force me to spend at least 1,000 ILS on a monthly basis.

2. Take an interest only loan for 6%, no loan payoff for the first 2 years. This is a loan taken in the UK and is based on the property (they will cover the 75% needed for the purchase). Assuming this will be a 69,000 GBP loan, we are talking about 4,140 GBP yearly cost, which can be covered by the rent.

There are many considerations here such as foreign currency fluctuations, but I'd like to ask specifically about the pros and cons between these two choices. Option 1 contradicts the 'Cash flow is king' paradigm but it allows me to accumulate equity. On the other hand, this might prove risky in case one or all of my properties will be vacant.

Regarding interest only loans - I know that it will keep me safe in terms of cash flow but it will take time until I'll be able to pay back the loan. I'm assuming appreciation here, but this is dangerous as I am speculating (I had done an extensive research on the local market and similar properties are already sold 10% higher, but still - speculation).

Thanks for replying!