Investment properties are an attractive asset class for many investors. However, financing an investment property can be more challenging than getting a mortgage for a primary residence. Interest only loans allow real estate investors to reduce their monthly payments and improve cash flow from rental income. This article will explore interest only loan options for financing investment properties, including loan terms, qualifying criteria, and tax implications. With the right financing strategy, real estate investors can build wealth through rental income and appreciation on their investment properties.
Interest only loans lower monthly payments for investment properties
Investment properties generate rental income, but investors still need to cover mortgage payments and other expenses. Interest only loans only require paying the interest portion of the debt service every month. This significantly reduces monthly payments compared to fully amortized loans. Lower payments improve cash flow so more rental income is available to the investor. Interest only periods typically last for 5-10 years before payments include principal. This gives the investor time to build equity through appreciation before higher payments kick in.
Stricter lending standards apply for investment property loans
Lenders have stricter requirements for mortgages on investment properties compared to primary residences. Minimum down payments are typically 20-25%. Debt-to-income ratios must be lower to account for the risk associated with rental properties. Interest only loans also require a higher credit score and lower loan-to-value ratio. The property itself must generate sufficient rental income to demonstrate it can cash flow at higher payments when the interest only period ends. Overall, interest only investment property loans require more equity and better finances than conventional mortgages.
Interest payments on investment debt are tax deductible
A unique advantage of financing investment properties is the tax deductibility of interest payments. The IRS allows investors to deduct mortgage interest, property taxes, repairs, and other expenses related to rental properties. This can offset a significant portion of rental income for tax purposes. As a result, an interest only loan will have lower after-tax payments during the interest only period. This enhances cash flow available to the investor. When payments include principal later on, the deduction will be smaller. But ideally equity will have increased by then through appreciation.
Interest only loans allow real estate investors to reduce their monthly payments and maximize cash flow from investment properties. While qualifying standards are more stringent, interest deductibility provides a tax advantage for financing investment properties versus primary residences. For investors focused on cash flow and long term equity growth, interest only loans are an attractive financing option.