I love that you brought up this topic! Many investors have historically preferred fixed rate mortgages, but there are other options that provide more value to the investor in a high interest rate environment. With ARMs (adjustable rate mortgages), these allow investors to cash flow higher than a 30yr fixed option, for a fixed period of time. This is due to the fact that ARMs, on average, have a lower fixed interest rate for a set period of time. Depending on the lender, ARMs typically have an interest rate 25 BPS to 50 BPS lower than the 30yr fixed rate option. This will improve cash flow while still paying down the principal balance of the loan making it easier to refinance down the road, but the difference is not as significant as 1+ points, as some assume. Examples: 5/1 ARM, 7/1 ARM, 10/1 ARM, etc.
Another option, as other BP members have already mentioned, is long-term debt with an interest only introductory period. This allows you to maximize cash flow for the first 5 or 10 years because you are only paying down the interest on the loan and not the principal balance. For new investors, this means you're payoff on the loan is not changing during this time. Interest only options truly make sense if the primary concern is max cash flow and not maximizing cash out proceeds after the interest only introductory period ends. Especially when investors are buying in a market where real estate values are hyperinflated. This is limits investor's ability to refinance because they are strictly relying on the property to appreciate over time.
The real estate market is cyclical and directly correlates to inflation, so there will always be a minor rising and falling of property values. However, the real estate market has a linear progression of appreciation because the only way to prevent property values from increasing year-over-year is to have no inflation throughout that time. I'm not an expert on the economy, but I certainly do not see that happening! A high interest rate environment is the Fed's way of combating hyperinflation. There will likely be a market correction and these market corrections typically occur every 10 years or so. They may be minor, but they are bound to happen eventually.
All that to say... these are my opinions and the factors that I consider, based on my experience and studies of the real estate market, when determining what loan option to choose for each deal. Every investor's business plan and risk tolerance is different, so many people may disagree with me and I love having those discussions! That's what makes investing in real estate fun!
Hopefully, this helps!
