7 Simple Reasons Why Pay Option ARMs Are Perfect For Buy & Hold Real Estate Investors
by Fred Hopkins
Have you heard about all the bad press about Cash Flow ARMs and all the other kinds of loans that contains options where your loan balance increases over time? Much of it is warranted! This loan is a tool and just like any tool, there is a right way to use it and an incorrect way!
Most people that get Cash Flow ARMs do it only to receive a lower payment on the home that they live in. They couldn't afford it using any other kind of financing. They finance the house to the hilt and quickly they get upside down when their loan amount begins to get bigger!
Smart Loans are a good choice when your home is experiencing steady appreciation (5% or more) because this type of mortgage has the ability for negative amortization (the loan balance can actually increase throughout its history). In this situation, the rate of appreciation will simply out pace any increase in the loan balance.
Cash Flow ARMs are good for houses that you are financing under 90% of the value or purchase price. In quickly appreciating housing markets you can get away with a higher amount but leaving a 10% equity cushion in the home is bare minimum. Why? Well, ff you get rid of the home via normal channels, your selling expenses could be anywhere from 9-15% of the sales price! No one enjoys the idea of having to come out of pocket to get rid of a house! You want to earn money!
Real estate investors will discover some of the largest benefits in using Cash Flow ARMs. When you take a house that meets some of the criteria discussed earlier, using pay options will afford you the following:
1. Payment Flexibility ? Just like the name of the loan states, you have different payment options. One, you have the payment based on the start rate of the loan (which could be as low as 1%!). Two, you have the interest only payment. Three, there is an option to make a payment based on a 30 year term. Lastly, the fourth pay option is based on a 15 term. The last 2 pay options allow you to pay down on principle if you choose.
2. Increase Monthly Revenue ? Cash flow is the main objective when dealing with rental property and cash flow ARMs are one of the best methods to increase it. Used correctly, cash flow ARMs can increase the revenue on you rental by over 100%!
3. Minimize The Cost Of Vacancies - Anyone who owns investment property has had vacancies. If you haven't yet, just wait you will! One single month of vacancy, property dependent, will nearly wipe out the cash flow for nearly a year! Don't believe me? Go ahead and tally up the holding expense for carrying the loan, utilites, cleaning, and a little maintenance and repair and see what you get. If you had a way to reduce the biggest expense, the mortgage, by a third, wouldn't that ease the pain? Again, pay option ARMs are the answer!
4. No more worrying about surprise maintenance costs ? In the same line as the vacancy example, you will be better able to minimize the effects of an surprise repair because your revenue has over doubled.
5. Give incentives to residents for good "behavior" ? You can get very creative here. Credit for paying before the beginning of the month (for example, payment by the 25th). Discounts on longer term leases such as an 18-24 month lease, etc. The extra revenue from using a pay option ARM can smooth out you tenant churn and give you ability to assist you with tenant retention, particularly in a renters market!
6. Use the house to get rid of personal debt ? If your cash flow from getting a pay option ARM increases from $250 to $500 a month, you can use that extra money to consolidate your car, credit cards, student loans, whatever.
7. Save the extra income to buy more property! ? Better yet, start saving that extra cash flow to buy more property! You will use pay option arms, collect more cash flow and use that to buy even more property! Then your business feeds off of itself without you having to use your salary for your 9 to 5 to fund it!
About the Author: Fred Hopkins is an 8 year consumer loan industry vet and a real estate investor. He specializes in bad credit home loans and investment property loans. To sign up for his FREE Investor Financing Newsletter go to http://www.mountaintopmtg.net/investorloans. Get your own completely unique content version of this article.
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