Posted by E on February 28, 2001 at 11:24:04:
If you had 30 yr. fully amort. loan, you might have paid down about balance about $100.00 in a year. So, if you did not have the opportunity to invest the additional cashflow, you still would be basically at 0 or up $830.00. I used PV-$90K, N-30 yrs., int.-7.5%,PI-563. Not much difference to me…
-E-
Negative Amortization - Posted by DenyDawg
Posted by DenyDawg on February 28, 2001 at 24:08:37:
I just read a short very basic article on “Negative Amortization Loans” and wondered if this would be something that would work when buying rental properties to keep cash flow up? Any thoughts for this very new dawg in real estate investing ? Thanxs
Re: Negative Amortization - Posted by phil fernandez
Posted by phil fernandez on February 28, 2001 at 08:32:51:
I would not consider a negative amortization loan. For the small amount of cash flow relief you might achieve, you would be getting further and further behind as the principal loan balance will be growing. And probably at a much faster rate then and cash flow benefit derived from this idea.
Re: Negative Amortization - Posted by E
Posted by E on February 28, 2001 at 10:44:56:
Phil, if the property is appreciating a good rate and you used the additional cashflow for higher rate return investmenst, could it be beneficial in that case.
Re: Negative Amortization - Posted by phil fernandez
Posted by phil fernandez on February 28, 2001 at 11:11:26:
What you suggest is a possibility, but all of the variables are going to have to be lined up with the stars sorta speak.
First off you and I have no idea about what future appreciation will be. Property values could certainly flatten out or even decline some. How do I know this can happen. I’ve been through about three cycles of this starting way back in the 70’s.
Can you use the extra cashflow to invest in an instrument that will give you a higher rate. Possibly, but again that’s not a given either.
Let me give you a hypothetical example. $90,000 negative amortization mortgage on a house worth $100,000. Property goes down 10% in the next year. It is now worth $90,000. In the meantime your mortgage has grown from $90,000 to $95,000. Now you are upside down to the tune of $5,000.
Even if your invested dollars did well and you made a $5,000 profit at the end of that year where are you now. Back to zero.
That negative amortization mortgage that you took out is just too risky with all of the possible variables and the fact that we really can’t see into the future.
At least that’s my take on it.
Yeah, what Phil said… - Posted by Eric C
Posted by Eric C on February 28, 2001 at 11:40:01:
Hi -
I was going to respond about the uncertainty of appreciation but Phil did such a good job, my input isn’t needed.
I will, however, add that I do like negative cash flow properties – at least some of them.
Most often, for me, these come at low rates of interest, very short terms, and very high payment amounts.
That’s OK. While I don’t count much on appreciation, I certainly do plan for the benefits of amortization.
Yours,
Eric C