You and those that know me well know I’m not anti-interest only loans. I’m just anti-anything that is mis-used.

Obviously, in your hands, an investor will get the right advice.

I’d never do that with you. You’re a good guy, and know exactly what you’re talking about.

The critical factor in this comparison from my viewpoint, is the fixed rate vs neg/am. If the property in Texas goes up (after the correction) at the normal Austin/Dallas rate — roughly 3-7% depending on the year, that works well with the leveraged position.

That appreciation for neg/am loans just breaks the investor even — which you’ll agree, isn’t a nuance.

All other debate kinda goes by the wayside once that’s been established. The difference in rents relative to price becomes crucial. Because the lower rent region simply WON’T support anything but a neg/am loan, (using 10% down) the only alternative is to head to the other investment.

There’s a huge difference if you’re the investor, as five years of a growing loan balance more than changes their outlook. It’s really not a close call at all, in my opinion.

I’m still running the two scenarios but I’m not sure the differences are as large as you’ve laid out. And I’m sure you agree that at some point, 12 years(?), the compounding of #1 overtakes the cash flow of #2.

After 5 years the 1st returns the $23,000 plus $137,000.
After 5 years the 2nd returns the $23,000 plus $62,000.

The 1st costs a difference of ($2200-$1450) $750/mo extra or $45,000 but more like $60,000 after considering lost opportunity costs. That looks halfway closer to a wash than a clear choice. At that point tax considerations could swing the balance.

We are discussing nuance. This is precisely why educated and honest estate planners are valuable. Please don’t mistake my alternative analysis for criticism or negativity.

There, wasn’t that easier?

Your point about maintenance is much too generalized though. Each property must be analyzed as a stand-alone opportunity.

As you read, I called $100/mo positive cash flow a break even, which in my 38 years of experience is factual.

That said, and as you imply, Murphy is alive and well, and knows where we all live. Furthermore, sooner or later, as I incessantly remind my clients, it ‘will be your turn in the barrel’.

You should tell the millionaire’s created by the prudent used of neg/ams they used the wrong loans. Those same investors, as your counsel suggests, Michael, are now using fixed rate amortized/interest-only loans.

In other words, they’re adjusting to the new market realities with which they’re faced. Meanwhile, the equity they’re traded into those fixed rate loans are 10-50 times larger than when they started, years ago — bigger because they used neg/am loans in the right markets, for the right reasons, at the right times.

We pretty much agree on this subject Michael. At least I think so.

This is a good read for any investor considering the risk of fix vs. neg am. A couple of quick points though. #1) A property cash flowing $100 per month is no where near break even for the investor. After maintenance cap ex and other cost, you are probably down $1,000 or more a year. No biggie, just dont want anyone being mislead

#2) The problem with the neg/am scenario is that it assumes predictability of markets. This is one of those situations where if you are right 3 of 4 times, you would probably end up losing money on the whole. Perhaps a better scenario for a negative am loan would be for a property in need of improvements. There is a sweet spot, where you can purchase houses that qualify as conforming, but still have significant upside with some TLC. There you are manufacturing the appreciation and Negative am loans can really work for you. Otherwise, I can really think of a market that appreciates fast enough on a regular basis that would make getting a negative am loan worth it. Its just not a significant enough gain for the risk, in my opinion.