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 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!

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 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 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 rental property and pay option arms are one of the best ways to maximize it. Used correctly, pay options arms can over DOUBLE the cash flow on your property!

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 unexpected repairs – In the same regard as the vacancy example, you will be better able to shrug off the effects of an unexpected repair because your cash flow 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. 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 additional revenue to purchase more property! – You will be able to use pay option arms to buy even more property! That way your business starts to feed off of itself without you needing to use your the earning from your 9 to 5 to finance it!

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