How Interest Only Loans Can Create Positive Cash Flow Property
Interest only loans are a type of loan where, as the name suggests, you only pay the interest on the loan not the principle. These types of loans can be extremely powerful for creating positive cash flow investment properties.
This is because their weekly or monthly repayments are so much lower than a principle and interest loan. This lowering of expenses means that you can have a lower rental yield and still produce a positive cash flow.
Let’s take an imaginary $300,000 investment loan as an example. Assuming you are paying an interest rate of 8% p.a. you could be saving $73/week or $3,796/year. Let me show you how:
A principle and interest loan with a term of 25 years comands weekly payments of $534/week. However, when you are only paying the interest then you only have to pay $461/week. The difference between the 2 loans is $73/week.
That may not sound like a whole lot of money, but that is $73/week you don’t have to receive in rent to pay your mortgage. That is $73/week that you could be saving yourself, or putting directly into your pocket. That amount of money could easily turn a negatively geared property into a positive geared property.
How Do You Pay Off The Principle?
Interest only loans are generally only written for a period of 5 years. At the end of this 5 years you can create a new interest only loan or you can change your loan to a principle and interest.
Hopefully in 5 years the rental income you are receiving on your property has gone up enough that you could now afford larger repayments and still generate a positive cash flow. You then change the terms of your loan and allow the increased rents to pay the principle on your loan (so it never have to come out of your pocket).
You can also use an offset account to pay down your loan. This allows you free access to your money, but you can offset the interest repayments on your loan. This can lower your interest even further, while still giving you the freedom of access to your money
How Can You Use This To Grow Your Portfolio
I don’t know about you but I wouldn’t be able to increase the rents on my properties by $73/week instantly to cover my higher expenses. For rent to rise that much it will take a number of years.
However, I can access that $73 in the form of savings, and I can then use that saving to grow my portfolio.
Interest only loan increase your serviceability. You can afford more loans because the payments on each loan are smaller.
Interest only loans help you invest in more property faster. You can use the extra $73/week to save a deposit for the next property, or to do renovations to increase your rent. You can spend that money growing your portfolio instead of paying down the debt.
Interest only loans aren’t for every investor. But they are a good way to increase your cashflow by decreasing your expenses.