Interest only: Good or Bad thing?

Question

Guys, lately I've been catching a lot of flack for my last seller finance deal...

Our seller offered 5% interest only for 7 years...I jumped at it. But, some people think interest only is dangerous.

Pros:

- more cashflow

- lower rate than average rate (~7% now, higher for investors)

Cons:

- No principal paydown (kills one of the main real estate benefits)

- Balloon payment

What are your thoughts?

Ned Carey · Answer

@Zachary McDonough as I read posts recently, I see so much bad advice, I keep thinking I need to add to every one;

"Careful who you listen too."

Do the people saying this, realize how little of the principal is paid down in the first several years of a 30 year loan?

Interest only does add a little more risk if you are not disciplined with your money. But it is not a “Bad" option. It is just s choice with pros and Cons.

Robin Simon · Answer

Not sure why principal paydown would be one of the main real estate benefits "killed" by IO - you are just keeping the money in your pocket rather than paying it down, not losing it

Ned Carey · Answer

@Zachary McDonough Since you are at a below market rate. If you simply increase your payment to the amount you would pay with say a 6.5% interest rate, you would get significant principle pay down.

Of course this way you have the option of paying more or not.

I think you understand this, but we are all  concurring with you, that it can be a good choice. Ignore those that don’t even understand what you are doing and why.

Mike Dymski · Answer

If we carry reserves and buy properties that have little to no risk of extended periods of vacancy or permanent decreases in value, we don't have to lose sleep over debt.

Chris Seveney · Answer

@Zachary McDonough

I do not see an issue with this at all because you are below market interest rate and the term is lengthy

If it was 12 months interest only and you make no down payment then refinancing in a year could be problematic

One question I would ask is what was the purchase price compared to market value? If you paid above market price that is where some could argue it’s not wise as with owner financing you are either getting a good rate and bad price or bad rate and good price, typically both are not advantageous to the buyer

Zachary McDonough · Answer

It was under market value.

PP:$150k

Repairs: $60k (brought a partner)

ARV: $300k

Good spread. Partner left $80K in the deal between closing, down payment, and repairs. $1k/month gross cashflow.

Anthony Garza · Answer

Currently working on a seller finance in Interest only for 4% on 4 years. It’s not bad if the deal makes sense. Make sure the deal makes sense.

Brian Wilson · Answer

Depends on your goals, how the deal is structured contractually, etc. I would need more info on the deal to say whether in my opinion it's a good deal or not. I personally don't like IO loans, however many people run their entire business off that model and have done very well. Just have to have a solid plan in place for recasting, refinancing, or offloading the property prior to the 7 year mark. Also have a contingency plan in place.

Victor Mammarella · Answer

I'm currently making a deal where I pay principal only. That way I can offer a higher monthly payment and all the money goes to me.  Anyone have experience with this? Kind of going the opposite direction of OP

Interest only: Good or Bad thing?

Most Popular Reply