Question on Interest only loans..

[Raden Mantuano]

Hey everyone! 

So for those of you who’ve followed my previous post on getting my first rental property via seller finance, I wanted to follow up and get some insight on some of the terms we’ve agreed upon and accepted (In escrow now) the terms are as follows.

Purchase price $44k

Down $500

Note $43,500 financed at 8.5%

9 year interest only payments $308.13

balloon payment of principal at the end of year 9 (refinance)

Rent $650-$680

Property Management: 10% - $65/mo

Insurance: $43.75

Taxes: $340.20/yr = $28.35/mo

Vacancy Rate: 8.8% - $57.20/mo

Capex aka Repairs: 5% - $32.50/mo

Netting between: $115.07 and $215ish (not the best but something) 

My question is, with the terms agreed upon, I realized that because I’m paying interest only (Cashflow purposes) for 9 years and having to pay the full principal amount in 9 years, Does this mean I’m depending on the market appreciating? What happens if the market barely appreciates and I’m at year 9? What if it’s gone up only $5k, does this mean I have to come up with $38,500 somehow? Can I still refinance? Or are there other ways to pay the principal off? 

I was hoping to save the cashflow to get more properties... 

When the seller and I were going back and fourth I was totally going for more of the cashflow and acquiring the property with low to no money down during our negotiation...

I also was thinking if I just snow balled and used the cashflow to get more properties that are also cash flowing I can easily just have the balloon payment 9 years from now..

Thanks for your help guys! 

[Nathan Gesner]

I don't think you're ready. According to your other post, you had to borrow from family just to obtain the $500 earnest money deposit. This indicates you have nothing saved as a reserve and are banking on the tenant's rent to help you save up.

In reality, most homes have problems after purchase. It sits vacant for two months. An appliance breaks. The furnace goes out and requires repairs or replacement. In almost every property I've ever bought, there were unexpected expenses within the first six months even though I did a property inspection with a professional.

How are you going to float the payment each month if it's vacant? If no tenant, you will still have to pay the mortgage, taxes, and insurance. You also have utilities which I assume could run at least $150 a month in the winter. This will cost you as much as the earnest money deposit every month! Are you going to borrow that from family?

I regularly tell people it is a mistake to put your last dime into buying a home. It's even worse to borrow money to purchase a home because now you are indebted to two people and you still don't have funds to handle an emergency.

I recommend you find a reason to get the earnest money back, pay off your family, and focus on saving and preparing for your purchase instead of trying to borrow your way to wealth. If you can't save $500 for a deposit and a reserve fund of at least three months vacancy then I think you're asking for trouble.