Thoughts on interest only loans

[David J.]

What are your thoughts on interest only loans for buy and holds? I see the plus as more cash flow, but the downside of no principle paydown. My thought was that increasing cash flow in the growth stage of a portfolio would allow for a more rapid growth. You would also have the ability to elect an amortization schedule that fits your goals.

Once your portfolio reaches your target for growth/size, the cash flow could be applied to the principle to pay down the loans. Isn't the principle paydown just a forced saving account at the end of the day? Wouldn't you rather have the cash?

[Peter M.]

David,

I agree with Bill completely. I would only use IO loans for a short time mainly due to a lack of equity. In fact, I did exactly this on the multifamily property I bought. It was in terrible shape, all 4 units needed major work, and besides the one tenant I inherited (whom I had to evict) it was completely vacant. So with no tenants ie. no income, the lower interest only payments for the first few months were very beneficial while I completed the renovation.

Now that I have some cash flow, that money goes towards principal and equity. My renovations coupled with the improving real estate industry should create a nice little bit of leverage for when I purchase my next property. Had I been making interest only payments this whole time, that amount of leverage would be considerably smaller. Hope this helps.