Thanks for the feedback. There seems to be a little confusion in my example so maybe a few specifics would help. Obviously these are grossly oversimplified scenarios that don't include maintenance, vacancies etc, which would be present no matter how the house is paid for, but it may help illustrate my dilema.
Purchase Price 100,000 Market Rent $950
Scenario #1-Traditional Purchase, 20% down, 30 year fixed interest loan:
$100k-$20k down, Finance $80k @5%, PITI Payments of $690=CF of $260/mo
($20k invested, $3120 received =15.6%ROI year one. After 5 years, 78% of the original investment has come back to me and after 10 years 156%)
Scenario #2 (Which my original question is about)
No money down,PRINCIPLE ONLY Payments of $1000/mo. with the remaining balance ($76,000) due after 24 months.
First two years look something like this (Loan+Taxes/Ins.=$1250/mo, resulting in $300 negative cash flow for 24 months)
Total invested in 24 Months=$7,200 ($300x24 mo.)
Now I need to make some assumptions about future value and interest rates for a refi after 24 months. I realize this is where the risk is in this deal as no one knows where the value of the home or interest rates will be, but for the sake of illustration, I worked out a couple different scenarios.
If value of the home stays the same or increases, I owe $76,000 on a $100k+ home, putting this at less than 80%LTV, allowing for a refi at the market rate without putting additional money down. Understanding that the market interest rate will not be known, for this example I'm going to assume investment property 30 fixed interest loan will increase 2% from 5% currently to 7% to test the numbers. The new rate could be more, could be less after 24 months.
New Loan of $76k @ 7%=PITI of $764/mo, resulting in $186/mo. CF
After 5 years, I have $7,200 invested, have received $6,696 or 93% of my investment back. After 10 years I have received 248% of original investment (At 6% new interest rate, 5 year return would be 118% of original investment and after 10 years it would be 315%)
If value of the house drops, I would need to come up with additional money down in order to refi. For this example I am going to assume what I consider to be a drastic reduction in value of 24% (to keep the numbers easy) over the 24 month period (which I consider very unlikely but certainly possible). It would look something like this:
Owed $76k with a value now at $76k. I have already invested $7,200 in negative cash flow over the previous 2 years.
To refi, I need to be at 80%LTV meaning I need to put an additional $15,200 down
Now, total invested is $22,400.
With the same financing assumptions as above, new loan is
$60,800 @7%=$662/mo PITI which means $288/mo CF
In this scenario where value of the house drops 24% in the two years I am paying no interest, after 5 years 77% of total investment has been returned and after 10 years 123%
The appeal to me of this deal is that I am essentially able to finance my down payment INTEREST FREE, so I am able to preserve my current capital for other deals, and if bad things happen over the two year period, I eventually put down the money I was hoping to avoid having to put down, but I don't have to put it down all at once, and still receive similar returns.
It may also help to know that I am not and am not trying to become a full time investor, relying on current investment cash flow. I have a job that supports all of the above numbers and my investment goal is to create cash flow and equity about 15 years from now when I retire.
Sorry for the long post, but I'm still trying to work this out in my head as well. I appreciate the feedback so far, but I hope more specifics will lead to additional thoughtful feedback
