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 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!

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.

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 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. 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. Stop worrying about unexpected maintenance costs – In the same line as the vacancy example, you will be better positioned to minimize the effects of an unexpected repair because your revenue has increased two-fold.

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 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!

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 www.mountaintopmtg.net/investorloans.
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