Today we are going to have a little fun with math. I used to hate math. But in my business now, math is my friend. So sit down. This post might be a long one.
As you know, I'm real big on knowing what the outcome of your 4 Benefits of real estate investing will be BEFORE you purchase an income property. And sometimes my clients like me to advise them on different financing options. So today we are going to compare conventional non-owner occupant financing with interest only non-owner occupant financing.
The first note to make here is that when you go with an interest only loan you immediately reduce your 2nd Benefit, Principal Reduction, to zero. So I'm not crazy about that. But is that a bad thing?
First we need some ground rules:
- $175,000 duplex in play here
- 20% down payment ($35,000)
- Financing based on $140,000
- 6.95% interest, amortized over thirty years
- 5% appreciation (on average)
- Rents are $1,500/mo. (not escalating)
- Expenses are $6,920/yr and include property management, taxes, insurance, a healthy reserve fund and 5% vacancy
Conventional Financing
With the conventional financing for our sample rental duplex the monthly debt service will be $926.73. Or $11,121 per year. Plugging in our numbers from above we know that our formula goes something like:
Click Here to read the rest of this post concerning Financing Options for the Real Estate Investor.
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