7 Simple Reasons Why Pay Option ARMs Are Perfect For Buy & Hold Real Estate Investors
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!
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!
Cash Flow ARMs are a good choice when your house is seeing steady appreciation (5% or more) because this type of mortgage has the ability for negative amortization (the loan balance can actually increase over time). In this case, the rate of appreciation will simply out pace any increase in the loan balance.
Smart Loans are good for houses that you are financing under 90% of the appraised value or purchase price. In quickly appreciating markets you can get away with a higher amount but leaving 10% equity in the property is bare minimum. Why? Well, ff you get rid of the property through traditional channels, your selling expenses could be anywhere from 9-15% of the sales price! No one likes the possibility of coming out of pocket to sell a house! You want to make money!
Real estate investors can find some of the biggest benefits in using pay option arms. When you take a property that fits some of the criteria mentioned previously, using pay options will afford you the following:
1. Flexible Payment Structure ? Just as the name Pay Option ARM states, you have different payment options. One, you have the payment based on the start interest rate of the loan (which could be as low as 1% or less!). With the second option, you have the interest only payment. Three, There's an option to pay based on a 30 year amortization term. Lastly, the fourth pay option is based on a 15 year term. The last 2 pay options allow you to pay down the loan balance if you want.
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. 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!
About the Author: Fred Hopkins is an 8 year mortgage industry vet and a real estate investor. He specializes in online home loans and investment property loans. To sign up for his FREE Investor Financing Newsletter go to http://www.mountaintopmtg.net/investorloans.
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