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

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!

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 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. 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 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 tenants for good behavior – You can be very creative here. Credit for paying before the first of the month (for example payment by the 25th). Discounts on longer term leases such as an 18-24 month lease, etc. The extra cash flow from using a pay option arm can stabilize you turn over and give you tools to help you with tenant retention, especially in competitive markets!

6. Leverage the house to consolidate personal debt – If your earnings from obtaining a cash flow ARM goes from $250 to $500 a month, you can utilize 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!

Article Source: http://www.myaddirectory.com

About the Author: Fred Hopkins is an 8 year mortgage industry veteran and a real estate investor. He specializes in online home loans and real estate investor loans. To sign up for his FREE Investor Financing Newsletter go to www.mountaintopmtg.net/investorloans.

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