All Topics / Hotch Potch / Financing a Lease Option

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  • Profile photo of dejaWCDdejaWCD
    Member
    @dejawcd
    Join Date: 2003
    Post Count: 3

    Hello,

    I’m new to the LO game and am wanting to do one very soon. However I still have some questions regarding the loan to get when purchasing a property for a LO. I am under the impression that with a LO you can finance using BOTH an Interest Only loan and also a P&I loan. Can someone outline the advantages and disadvantages of using either one, and also whether to fix or not to fix is best?I have had conflicting views about financing a LO.
    I know that one of the differences is that with an i-only loan the repayments are less and therefore the cashflow is bigger. But my concern is that if using an i-only loan I wouldn’t be able to access equity from this property to purchase more in the future because I’m only paying off the interest this whole time??? Or am I able to make voluntary principle payments to gain equity for future purchases?

    Someone please enlighten me
    [blush2]

    **************
    dejaWCD
    **************

    Profile photo of MarcoMarco
    Member
    @marco
    Join Date: 2003
    Post Count: 66

    Hi dejaWCD,

    there are a couple of views here. One of the decisions that you need to make is how you want to realize your profit. Do you want all your cash flow now (and not pay off any principal), or do you want to take the balanced approach and take a little less cash flow, pay a little principal off the house and even make a little capital gain? Bearing in mind that if you take all your cash flow now you are not leaving much room for mistakes along the way, i.e. if your tenant moves on how do you deal with the situation? Also, you would be relying on the market to grow for your capital gain.

    If you want you cash now, go for the LOC. If you want to take the safe option (IMHO) then go IP and have a little principal in reserve.

    When applying for finance, I don’t use the equity of IP 1 to finance IP 2,3 &4. If you choose to (and it is a valid option) then be aware that when IP1 wants to cash out you need to refinance all the other IP’s as well. Keeping things separate means that you may take a little longer to achieve your goal, but it also give you a little more flexibility later on down the track.

    Hope this sorta makes sense. I’m certain other will have input as well.

    Have a great day!

    Marco

    Profile photo of dejaWCDdejaWCD
    Member
    @dejawcd
    Join Date: 2003
    Post Count: 3

    Thanks Marco your information is very helpful.

    I’m still familiarising myself with all the acronyms and I’m not sure what “IP” and “IMHO” meant in the following statement in your reply:

    If you want you cash now, go for the LOC. If you want to take the safe option (IMHO) then go IP and have a little principal in reserve.

    The question I asked about using equity to purchase further IPs is because I don’t want my first invesments to affect my borrowing capacity for future purchases, but I guess if they’re all cash flow positive and taking care of themselves I won’t have any trouble getting subsequent loans for future purchases?

    If I get an i-only loan is it usual with LO deals to make principal payments during the LO period? Or is this a question of pure personal preference for cash flow? I’m thinking that in using i-only loan, because the cashflow margin is higer than P&I loan, I can use that cash flow at my own discretion to reduce the principal or use it for something else whereas P&I you don’t have the flexibility of that?

    Also – I’d like to get views on fixing interest or not fixing interest on LO deals, and its implications if the tenant decides to get out before the LO period ends.

    [biggrin]

    **************
    dejaWCD
    **************

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Beware of fixing rates with LOs. I did this on one of mine, then the tenant cashed me out earlier than expected, and I had very high breakcosts – which I couldn’t pass on.

    With a LO you could do either PI or IO, and you could access the equity while using either of these, but becareful you don’t take your loan over what the tenant can cash you out for, or you may have -ve equity when they cash you out.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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