What do you think of using interest only loans on a rental property?

Question

Here's the details -

The property is a cottage on a lake.  My father owns it and is considering selling to a friend and myself.  We would use the property as a rental, but plan on putting any rental income against the note.  We will not be relying on any of the rental income to cover the monthly payments.  Monthly payments will come out of our regular income.  We will of course have a fund set aside for upkeep on the unit, etc.  

Does this work?  I figure the rental income should more than cover the principal we would not be paying with the montly payments.  And if the property is vacant during off months, it won't be a problem.  

Does anybody else manage investment properties in this manner?  I haven't been able to find much info on this on the web.

scottficek · Accepted Answer

I own most of my properties using interest only.  This was a more popular idea back when we saw strong positive capital appreciation.  You were betting on the house going up in value instead of paying down the mortgage.  

Plus if you are only keeping it for less than 5 years, your principle reduction in the first couple years wouldn't even buy you a nice couch for the house!

Frank · Answer

2

Anonymous · Answer

You do understand that by paying only interest on the loan, you could conceivably become upside down in the loan at some point?  With values in the housing industry declining these days, an interest only loan would be a last resort to try and keep the property from foreclosure.  

I don't recommend it as a way of having a lower payment.  

You might seriously consider discussing this scenario with an attorney.  When family is involved things can get real messy. Family relationships are more important than money.

? · Answer

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What do you think of using interest only loans on a rental property?

4 Answers