For my first real estate purchase, I used a Fannie Mae/Freddie Mac loan which had pretty good conditions. It’s a 30-year loan with a 20% down payment at an interest rate of 5.125%. Since I don’t qualify for a loan with those conditions at this time, I spent this month searching for other loan options.
The best option I’ve found is provided by one of the turnkey companies I’ve been in touch with. It’s a 10-year loan, the down payment is 40% of the house value, and the interest rate is 7.5% (while higher than the interest rate I’m paying on my first property, other lenders I spoke with offer interest rates as high as 12-15%).
So, what would this loan look like vs. the loan I received for property #1? Let’s examine the costs of property #1 with the loan I took for it (lets call it the “original loan”), and with the loan I’ll be using on property #2 (we’ll call that the “new loan”):
Original Loan
Down payment (20%) – $14,540.00
Loan term – 30 years
Interest rate – 5.125%
Monthly loan payment – $316.67
Monthly cash flow – $265
Cash on cash return – 17%
New Loan
Down payment (40%) – $29,080.00
Loan term – 10 years
Interest rate – 7.5%
Monthly loan payment – $518
Monthly cash flow – $63.67
Cash on cash return – 2%
As you can see, when looking at the cash flow, the 30-year loan has an advantage since it provides over $3,000 of cash flow per year, while the 10-year loan provides under $750 per year. However, after 10 years, the new loan will be entirely paid off, bringing the monthly cash flow to $581.67 (or $6,980 per year). That’s a 21% return from the initial $29,080 down payment.
To conclude, if we’re not looking for immediate cash flow, or if our goal is to create passive income in 10 years from now, the new loan can be an attractive option. So when you’re checking out different loan options, keep in mind what your goals are and you may see that initially less-attractive loans may turn out to be worthwhile.
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