7 Things To Consider When Financing Your Rental Property With Option ARMs

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7 Things To Consider When Financing Your Rental Property With Option ARMs

By: Fred Hopkins

Have you heard about all the bad press about Cash Flow ARMs, Pay Option ARM, Smart Loans and all the other variations of loans with negative amortization? A lot of it is warranted! This loan is a tool and just like any tool, there is a right way to use it and a wrong way!

Many people that obtain Smart Loans do it just to get a more manageable payment on the house that they live in. They could not afford it using any other kind of financing. They finance the house to the max and suddenly they owe more than what the house is valued at when their loan amount begins to get bigger!

Pay option ARMs are a good choice when your home is seeing good appreciation (5% or more) because this type of loan has the ability for negative amortization (the loan balance can actually increase over time). In this case the amount of appreciation will easily 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 may get some of the largest benefits in using Smart Loans. When you buy a property that conforms to a few of the criteria mentioned earlier, using pay options will let you get the following:

1. Payment Flexibility – Just as the name of the loan states, you have different payment options. One, you have a payment based on the beggining interest rate of the loan (which could be as low as 1% or less!). Two, you have the interest only payment. Three, there is the choice to pay based on a 30 year amortization term. Lastly, the fourth pay option is calculated on a 15 year term. The last 2 pay options allow you to pay down the loan principle if you choose.

2. Maximize Cash Flow – Cash flow is the name of the game when dealing with buy and hold property and pay option ARMs are one of the best methods to increase it. Used correctly, cash flow ARMs can DOUBLE the income on your rental property!

3. Minimize affects of vacancy - Everyone who owns rental property has had vacancies. If you haven’t yet, just wait you will! One month vacancy, depending on the property, can just about destroy the profit for an entire year! Don’t believe me? Go ahead and add up the holding cost for carrying the mortgage, utilites, cleaning, and a little touch up paint and see what you get. If you had a way to reduce the largest expense, the mortgage, by a third, wouldn’t that soften the blow? Again pay option arms are the way to go!

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 "deeds" – You can be very creative here. Credit for getting the lease payment to you before the beginning of the month (for instance, payment by the 25th). Reduce rent on longer term leases such as an 18-24 month lease, etc. The extra revenue from using a cash flow ARM can smooth out you turn over and give you ability to assist you with tenant retention, particularly in a renters market!

6. Leverage the property to payoff personal bills – If you cash flow from switching to a pay option arm goes from $250 to $500 a month, you can use that extra money to pay off your car, credit cards, student loans, whatever.

7. Put aside the extra money to purchase more units! – You will be able to use pay option arms to buy even more property! That way your real estate investing feeds off of itself without you needing to use your the earning from your 9 to 5 to finance it!

Article Source: http://www.find-investment-advice.com

About the Author: Fred Hopkins is an 8 year mortgage industry vet and a investment property owner. He specializes in bad credit home loans and investment property financing. To sign up for his FREE Investor Financing Newsletter go to www.mountaintopmtg.net/investorloans.
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