Using a 7yr ARM for a non-warrantable condo

[Gregg C.]

Hi All,

I am under contract on 2bdrm condo in the Park Hill neighborhood of Denver for $94,300. Having a difficult time finding financing since it is an investment property in a condo with the own-occ rate at 35% (non-warrantable number per FHA). I found a lender who will do a 7yr ARM (30 yr amortization), 25% down, 1.5% origination (unfortunately) at 4.125%. This is the best deal I have found of a handful of lenders who even offer a product in this situation. I don't want to bring more than 20% down and tie up more cash so I am using a HELOC from another property to get the extra 5%. I plan to pay the HELOC off in 3 years and have backed in a half a point annual increase in my analysis. The unit needs new windows ($2900 estimate) which I intend to use the HELOC for as well.

Factoring in the HELOC payments I still cash flow ~$800 per year (yes, not much). Once the HELOC drops away the cash flow is about $4200 per year. I would like to hold onto the property for a long time so in my modeling I am getting an average before tax cash on cash of 18% when looking out 20 years, which in Denver in this neighborhood right now I think is solid. But for the first 3 years cash-on-cash is 4% because of the HELOC payments. The cap rate without using the HELOC is 9% (again I think is solid in central Denver right now).

What scares me is what rates will be in 7 years. I can always sell the place of course and I think I am getting a good buy so even in 7 years think there will be some decent price appreciation. And the ARM adjustable rate caps out at a level that still cash flows.

Should I walk away from this deal? Too many moving parts? If I am paying a HELOC for three years and potentially need to sell after 7 years is this not even worth it?

Thanks for any advice, Gregg.