Should we go interest only to cashflow?

We are going to be closing soon and are wondering what to do.

Rent: 900/mo
Mortgage (everything):1350.00 (30 year fixed)
Mortgage: 184000.00
Our credit is 776

We also may want to get a HELOC for next down for next property…
Thanks for any advice!


OUCH! What a terrible deal. The purpose of buying a rental property is to make money, not lose money. The best way to make a property cash flow is to buy at a BIG discount. The question I always ask when someone posts a “deal” like this is: how many of these deals could you afford? If you’re losing $500-600 per month on each “investment”, how many “investments” could you have before you go broke??? After all, instead of making money like most investments, you’re losing money every month. In addition, I don’t see any allowance for vacancies, maintenance, management, etc (hence I’m saying you’ll lose $500-600 each month).

What’s worse, if you succeed in getting two of these things and they both happen to be vacant at the same time, you’ll be losing about $3,000 per month. See the problem?

Good Luck,


Interest only is the biggest no brainer in the history of mankind. Interest only your debt remains the same, while your asset increases in value, the principle that is not spent can now be invested in other appreciating assets. In theory the principle invested in other investments grows while equity principle payments create has a 0% rate of return. Example, 100k in debt at 6% is $500 per month, and maximizes your interest expense deduction without making taxable principle payments.

“taxable principle payments.”?

I don’t understand this part.
Could you please explain how payment on the principal is taxable?

You can’t deduct the cost of principle only payments on your income tax return. I am not a tax professional so maybe I should put in here that this isn’t advice? Anyways, if you are on a 30 yr fixed most of the payment is deductible, because most of the payment is interest. The portion of principle that you pay to the bank is fully taxed as regular income. worrying interest only or 30 yr fixed doesn’t make much of a difference unless you plan to buy and hold long term, but to get maximum deduction for each dollar spent on your monthly payment use interest only.

I’m with PM on this one. Why are you doing this “deal?”

As to interest only vs. fixed, the answer is ‘it depends.’

If you are planning on holding long(er) term, then I’d suggest a fixed rate, especially now while the rates are low.

Interest onlys are good in theory. However, most people don’t actually reinvest the savings.

Also, interest onlys usually are short-termed 1-5yrs in most cases. This forces you to either sell or refinance, likely at a higher rate.

In most cases, interest onlys aren’t fixed for that term. So, if interest rates rise, your payment goes up. Funny thing about that is when rates fall, your payments don’t go down nearly as fast as they go up.


OK, tubebuzzer, I see what you mean.

I should have read your post as “non-deductible principal payments.”

Yes, the funds for the principal portion of the payment usually comes out of after-tax dollars.

But by not paying anything toward the principal on an interest only loan, you are not avoiding paying the taxes on the dollars that would otherwise go toward the principal if the loan was amortizing.

These are still after-tax dollars; they are just going somewhere else instead of toward the debt service.

JKannie, are you sure the fair market rent is only $900 per month?

If the mortgage principal is $184,000, I’m guessing the fair market value of the house is somewhat greater than this balance.

The rent should be something near $1500 per month on a house worth $185,000.
It might still be a skinny deal, but it would not have such a large negative cash flow.
(Caveat: I’m going by my market.) What market are you in?

Also, this might be a good candidate for a lease/option.
With a L/O, you should be able to get a little more up-front cash, and a bigger monthly payment.
It’s just a thought.

I’m with Mike and Raj on this one - you can learn to buy at a better price and terms.
Negative cash flow is definitely something to avoid in most cases.

If you invest the difference in a investment that pays tax free, and has the ability to compound earnings then you can pay down the principle with tax free dollars and retain original after tax dollars. Usually tax advantaged investments aren’t very flashy, but over the long haul they can compound your real estate earnings significantly with tax free cash. I don’t understand the 'most people don’t actually invest the difference" as a reason not to do this. Most people don’t invest in real estate either! take a look at the 200 yrs of historical interest rates in the US they are very stable - save Carter years, and when rates rise, typically earnings rise on your side investments. Borrowing at a rate of 6% and reinvesting at a rate of 4.5% still earns a profit of nearly 300k in 30 yrs for people in a 34% combined marginal tax bracket. I think that is worth the effort - maybe 4 hours of planning - to earn an extra 300k tax free, and being the professional I am I consistently borrow at 6 and get 4.5 :slight_smile:

The area is Tucson, Arizona. The home is precon, now worth 250K, we owe 184K, which is why we want a HELOC, not to use right away, we have close to 25K in savings, and no 2nd on our primary residence. I just got a message from the mortgage company the we can get an 80/10/10 with a 5/1 interest only arm on the first and an equity line of credit on the second. I am not sure what an 80/10/10 is, but it will reduce the payment down. I will make sure there is no prepayment penalty. Thanks for all the advice! :wink:

“With 80-10-10 financing, the buyers make a cash down payment of 10 percent of the purchase price. They take out two mortgages: a new first mortgage for 80 percent of the price and 10 percent second mortgage. Often the first and second mortgages are from the same lender.”

Check out this link for more info:

If the home is new, and it is worth $250K, your rent will be above the $900 you stated at the beginning of this thread in almost any market. I don’t know what the rental market is like in Tucson, but I’ll bet you can get a lot more.

Perhaps a professional property manager in Tucson can give you some advice about the rents that you can expect there.

Thanks for the link; we already got the $900 dollar quote from a property management company. Maybe it was a conservative quote. I have seen new homes from 1050-1350, same sq. footage.

Doing an L/O is anouther idea. I was told they are very popular in Tucson, and also hard to find.

I enjoyed the process of buying preconstruction. They aren’t close to being done, I think the price may go over 300K when the final phase is sold.
Again, thanks to everyone for all the opinions and advice!

Just my 2 cents, but do you get a-lot of turist in Tuson Az? if so you might consider renting on a weekly basis or by the weekend, and during holidays charge more…for this to work well you must completley furnish the home to but when renting out you could ask for a 2500 deposit and charge accordingly…never been to Tuson but if anyone else is reading this it might give em some insight…Also you should get around 1% of the purchase price when renting a SFH so if you bought at 180k the rent should be 1800 monthly hope this helps.


At the marginal tax rate of 34%, the 6% borrowing rate
becomes effectively a 3.96% after tax rate.

6% x(1.00-0.34) = 3.96%

So, in your example, the differential between the
cost of your borrowed money and the tax free rate on
your investments is 0.54%

4.5% - 3.96% = 0.54%

The $300K that you mentioned still puzzels me.
It would take a rather large monthly annuity to reach $300K in thirty years at 0.54%.
If N=360, I =0.54%, PV=0, and FV=$300,000:
Solving for the average monthly contribution, you get p=$767.84.
That’s how much difference you have to have in an amortizing loan payment verses
an interest only loan payment per month (on a level average) to accumulate the
$300K in 30 years at the differential rate of 0.54%.
(Since an amortizing loan has an uneven principal component, this is an oversimplification.
The principal component would start off small, and increase each month as the principal is paid down.
It would take too much room to show this computation here, but you can do it in TValue.)

I agree that you can make money by borrowing at a
lower rate than you receive on your investment funds.
If you have enough money at work for long enough,
you can do quite well.

However, I would prefer a differential rate that is much greater than 0.54%.
Even if it creates taxable income, I think you can get a great deal
more return than the tax-free instruments (like muni’s) provide.

If you are not making at least a 15% to 20% cash on cash return on your
real estate related investments, then you need to invest in a little more education.
Buying mortages at a discount and restructuring them is one way to do this.
(John Behle has a good course on how to do this, among other things, called “The Paper Game.”)
Also buying tax certificates, financing flippers, options, etc.

So I concede this point to you:

If you have the financial self-discipline to really invest the difference in
payments between an amortizing loan and an interest only loan, these
funds will be equivalent to capital you can put to work to earn a return,
provided your real investment rate of return exceeds your cost of capital.


Here is a link to a couple of articles that might help to answer your original question.

Thanks for all the advice. We locked in today- 30 year fixed at 6.0%.

Good call!


And we can offset the -cashflow problem with…section 8 tenants!
That will bring us to -250 per month. However, since we have alot of disposable income, we may not want to go this route. It could turn into a nightmare.

Man! Section 8 tenants in a brand new $250,000 to $300,000 house.

Only in America can it be so good on welfare. ;D