Should I use a 5/1 arm instead of conventional financing?

[David B.]

Hi all!

I have a Fourplex under contract in a growing area outside Orlando. While I have two houses, this would be my first multifamily. 

Looking at conventional financing, my cash on cash return would be roughly 7% year 1. Which, isn't necessarily ideal. However, I'm factoring in appreciation on this property and annualized rate of return is closer to 22%

 I would like to be able to up the cash flow on this property. I know a lot of investors advise against a 5/1 arm, but when I do the math I see that it would add significant money to my pocket, increase my ConC to 11% year one, and I don't really intend on holding the property longer than five years. Preferably, I'd like to own the property, then 1031 exchange it into something significantly bigger. 

I've heard that the origination points on a ARM make it not worth pursuing, but frankly I don't fully understand that. If it cost me money to get that deal, but my cash flow brings in lots more money yearly, and the property continues appreciation, do i really care about the extra upfront closing costs?

Would love to hear your thoughts. 

*Note: I will be buying the property cash, then CASH OUT REFI in 3-5 months time, after I close on a primary residence. I'd like to refi @80 LTV with the lower ARM interest rate.


 

[David B.]

Quote from @Logan McKay Zylstra:

I agree with your thought process. You could even look at a 7-year arm if you want a bit more time for appreciation to run on that property. I like the idea of using a 1031 to trade up in properties. An increase in closing costs will obviously hurt your cash on cash return, but if cash flow is more important to you then go with it.

Thanks Logan! I see your local to me… I currently live in Lehi, Utah! Small World. 

question: if I purchase the house cash, can I refi @ 80% LTV into an 7/1 Arm? Or will it have to be 25% down?