I am thinking of buying my first rental property, a 4-plex, maybe, in the Twin Citiies area of Minnesota.
What is my best option for financing? My goal is not max cash flow (but definitely not negative), but asset accumulation.
It seems in my area it is hard to have positive cash flow if using conventional 30-yr mortgage. Some suggested Option ARM (5 yrs). With 20%down, Option ARM seems to give me about $10-5 K yearly cash flow, but also $30-40K deferred debt in the end of 5 years. Does it make sense? Are there better options there?
right now becuase of what the bond markets are doing the ARM rates are about the same as 30yr fixed. Thus, its worth it to lock it in at a fixed rate (IMHO). I did a lot of 5/1 ARMs a few years ago when the spread bewteen them and fixed was pretty big. Today I do fixed only.
I’m with 4EEM; Option arm is just covering up the problem. With 20% down you need to at least breakeven (if there is upside on rents) or better if rents are at market. This is not the right deal for you. Let someone else wrestle that alligator.
Depends on what your goals are. I’m closing on my first rental next week. I’m using a one year term, 6.25% interest rate, and will re-fi out of that in 6 months pulling money out of the property. I’m buying it for 55K. Appraisal came in at 70K. Positive cashflow of about 100 bucks a month. Not an earth shattering deal but the equity is nice and this place needs soffit and facia and that’s it.
Even if the loan is 55k, the difference between 6.25% and 7.25 is $33 per mn. Why not lock in and do a 2nd if you pull cash?
My thoughts are the following:
apprasials are bogus; they can move 10% easily based upon whether the apprasier like you or is having a good/bad day. No bank I have every dealt with will take an old apprasial; they always want a new one (at your expense)
refi will cost 1-3k at a mininum.
Not trying to attack you plan; just playing devil advocate. Let talk dollars (and cents). My expereience is re-fi sound great, but when you look at the Total Cost, you are at a zero sum gain (at best).
Do you have a home equity line of credit (HELOC) available? If so you could use that to purchase and refinance later. You could also use HELOC as your 20-25 % downpayment and finance the rest with a bank. Just a thought. I have been using my HELOC for deals because it is readily available and I don’t have to go through the loan process I have the cash available, I also use it to rehab. It is good for short term usage. Graciez
if you simply want to cash flow and have asset accumulation, try an interest only. a good 15-30 yr interest only will buy you enough time at a low rate. while buying time, place the rent profits in a some other investment vehicle at the same or close to the same interest rate. you will cash flow and grow wealth simultaneously.
interest only rate pretty much stink right now. In some cases you payment is HIGHER than a 30yr fixed, fully amortized.
I used them a lot a few years back when you get them at 5.5% for investment loans, but they are not the way to go right now (IMHO) as you will pay 7.5% and up.