Renting With An ARM?
I am looking at investment strategies, and this one makes sense, but I am ready to hear the negatives since it sounds too easy.
Couldn't one just buy a single family home to rent, using an ARM loan, and have a high positive cash flow each month. Say get a 5 year ARM, collect the positive income from the rent for 4 years, then sell the house and make the appreciation income too. By selling the house after 4 years you don't hav eto worry about higher interest rates later do you? The new owner would be able to refinance right? Thanks, I want to hear the flaws in this strategy.
Nothing wrong with it. You might want to consider either doing a lease/option to the tenant for the ARM period which would let them buy you out or selling on Land Contract with a balloon which would make their refinance purchase at the end of the ARM period easier to underwrite.
There is, of course, the risk that the housing market will decline rather than appreciate during the period you have it leased.
what if rates are sky and the market in the toliet in year 4/5.
you could use the same logic w/ a 10/1.
I was just thinking about this today. If the cash flow is so great that even w/ the ARM hitting its life time max, you'll make money, to need to pay for 30 yr money
Could even go interest only.
But can you really count on that appreciation? How much does it cash flow? Will it do by a good enough margin for you to cover vacancy, repairs, closing costs of your loan, other expenses, agent commissions on the resale?
This is what I'm doing right now... However it is a 2 family purchase and a 5/1 ARM. I am able to pay a minimum payment of 1.25% amortization... This will most certainly give me negative am, but as long as i pay a little extra during the months where I have the extra cash flow - I should be fine!
It fits into my goals...
Good Luck
[addsig]
There is nothing wrong by using ARMs for investment properties. The interest only options look pretty attarctive which improves your cash flow and gives you an option of paying your principle whenever you have extra cash. Some of the best ARMS in the market are CODI Index and LIBOR www.Index.Contact me if you need further 8-)
I would be cautious with assumptions about appreciation. You make your money when you buy, hopefully below value. If you have a fixer then you might have some added value in year 4 when you fix it up other wise if you have cashflow keep it going. Long term financing will protect you from any market turbulence. The L/O strategy could also work in this scenario.