Why Adjustable Rate Mortgages(ARMs) are a Great Loan for Rental Properties

Investing in rental properties can be very difficult without the right lender and the right loan.  The key to obtaining a lot of properties and a lot of cash flow is being able to finance many rental properties, not just a few.  I have purchased 7 rental properties and financed every one of them with a relatively low-interest loan.  I am currently making over 24% cash on cash return on my rental properties and you can see how I do it in my complete guide to investing in long-term rentals.

ARM’s

Adjustable rate mortgages or ARMs have gotten a bad name the last few years, but they are the perfect loan for me.  An ARM is a loan that starts with a low-interest rate, but the interest rate can increase after a set period of time.  A 5/30 year ARM is a 30 year loan with as initial rate that is fixed for the first five years, but can increase on the sixth year.

Low interest rate

An ARM is perfect for me for a couple of reasons.  The first reason is they have very low-interest rates locked in for a guaranteed time period.  I like 5 year ARMs because they give me enough time to pay off a loan before rates go up.  On my last property, my interest rate was 3.625 percent on a $70,400 loan, which equals a payment of $321.00 before taxes and insurance.  Add taxes and insurance and my total payment is around $420 a month. I will rent this property for at least $1,100 a month, which leaves a $680 cushion every month. Even if I have $200 a month in maintenance and vacancy costs that leaves $480 a month in cash flow. This is actually one of my lower cash flowing properties, but it is one of my least expensive properties as well.

Portfolio lending

Another reason I use ARMs is because they are one of only a few options available from my local lender who does portfolio lending. They offer 5, 7 and 15 year fixed loans as well as 5/30 year and 7/30 year ARMS. The 5/30 year ARM has the lowest payment and lowest interest rate and works perfect for my cash flow strategy!  When investors are buying many rental properties they will usually run into a roadblock when trying to get a fifth mortgage.  A portfolio lender is a great way to get a fifth mortgage, I discuss portfolio lenders and other ways to get mortgages on more than four properties here.

Are ARM’s riskier than a normal loan?

ARM’s have gotten a bad name tha last decade due to the high number of loans that were foreclosed on during the housing crisis.  The reason so many people lost their homes with an ARM, was they were qualified on the low initial interest rate of an ARM, but when the rate when up after five, three or even one year the home owner could not longer afford the mortgage.  If you are thinking of getting an ARM make sure you can afford the payment if the rate increases when your initial interest rate expires.

Related Articles

How to find a portfolio lender

My plan to purchase 100 rental properties

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2 responses to “Why Adjustable Rate Mortgages(ARMs) are a Great Loan for Rental Properties

  1. Pingback: Invest Four More’s Complete Guide to Purchasing Long Term Rental Properties | Invest Four More

  2. Pingback: How to Find A Portfolio Lender | Invest Four More

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