Financing Real Estate with an Option ARM
When I first started investing in real estate, I was like many other newbies, clueless to how important financing is to a real estate deal. When I bought a property, I would invest 10% of the purchase price plus closing costs and finance the other 90% with a 30 year fixed, traditional principle and interest note. I thought this was a great strategy for conserving my limited capital. It was effective, but not for long. Soon my limited capital was used up and my ability to purchase more real estate had ended. It would take several months before my current rental net income reserve would have enough funds to buy another property. How could I keep buying? Was there a better way to leverage myself and increase the net income?
My brother and I went on a buying tour with the founders of NAREI, Marc and Paula Garrison, and a group of other real estate investors. On that tour a fellow investor and tour mentor shared with us his strategy for finacing his real estate purchases. He was using a product referred to as a Pay Option ARM to finance his properties. He explained to us and shared with us his financial details of the twenty properties he had financed with the Option ARM. The monthly cash flows were amazing compared to the traditional 30 year fixed or interest only loans. My brother and I were intrigued with the cash flows. Our goal was to generate as much cash flow early on as we could. Using the Option ARM would bring us to our goal faster than what we were currently using.
It took some time and a lot of research to fully understand how the Pay Option ARM works. After many phone calls and emails to American Home Mortgage Loan Officer, Renee Benson, I finally understood the Pay Option ARM well enough to begin considering it for future deals.
I added the Pay Option ARM to my financial analysis spread sheet to compare the returns against other more traditional products. The results were terrific. The Cash on Cash returns were more than double the traditional loans. But what about the negative amortization and increasing principal? In an appreciating market, the gain in market value is greater than the increase in principal. The rate of appreciation required to keep the equity percentage in the black, is approximately 3.5% using current MTA index and margins of 3%. Not all markets are experiencing a positive appreciation rate, but the markets we invest in are.
The option ARM quickly became our preferred financing product. It more than doubled our Cash on Cash returns. Our average net income on a rental home went from $100 a month to $300 to $400 a month. A huge increase in monthly net income.
People that do not understand the Option ARM will talk negatively about it, but if you do your research, you will find that it is a powerful tool that every real estate investor should consider.
Not all lenders have a Pay Option ARM product. Not all Pay Option ARM products are the same. The best we have found so far is American Home Mortgage Pay Option ARM. They have the lowest start rate (1.4 to 1.9%, full doc and stated income respectively) and the friendliest investor terms. Not all Loan Officers understand or are even aware of the Pay Option ARM, so finding a good loan officer is key (thats a topic of a whole other discussion). I recommend contacting Rene Benson at American Home Mortgage. She knows her stuff and is great at getting deals done.
Do the math, the numbers speak for themselves.
Travis Foote
My brother and I went on a buying tour with the founders of NAREI, Marc and Paula Garrison, and a group of other real estate investors. On that tour a fellow investor and tour mentor shared with us his strategy for finacing his real estate purchases. He was using a product referred to as a Pay Option ARM to finance his properties. He explained to us and shared with us his financial details of the twenty properties he had financed with the Option ARM. The monthly cash flows were amazing compared to the traditional 30 year fixed or interest only loans. My brother and I were intrigued with the cash flows. Our goal was to generate as much cash flow early on as we could. Using the Option ARM would bring us to our goal faster than what we were currently using.
It took some time and a lot of research to fully understand how the Pay Option ARM works. After many phone calls and emails to American Home Mortgage Loan Officer, Renee Benson, I finally understood the Pay Option ARM well enough to begin considering it for future deals.
I added the Pay Option ARM to my financial analysis spread sheet to compare the returns against other more traditional products. The results were terrific. The Cash on Cash returns were more than double the traditional loans. But what about the negative amortization and increasing principal? In an appreciating market, the gain in market value is greater than the increase in principal. The rate of appreciation required to keep the equity percentage in the black, is approximately 3.5% using current MTA index and margins of 3%. Not all markets are experiencing a positive appreciation rate, but the markets we invest in are.
The option ARM quickly became our preferred financing product. It more than doubled our Cash on Cash returns. Our average net income on a rental home went from $100 a month to $300 to $400 a month. A huge increase in monthly net income.
People that do not understand the Option ARM will talk negatively about it, but if you do your research, you will find that it is a powerful tool that every real estate investor should consider.
Not all lenders have a Pay Option ARM product. Not all Pay Option ARM products are the same. The best we have found so far is American Home Mortgage Pay Option ARM. They have the lowest start rate (1.4 to 1.9%, full doc and stated income respectively) and the friendliest investor terms. Not all Loan Officers understand or are even aware of the Pay Option ARM, so finding a good loan officer is key (thats a topic of a whole other discussion). I recommend contacting Rene Benson at American Home Mortgage. She knows her stuff and is great at getting deals done.
Do the math, the numbers speak for themselves.
Travis Foote
