Create Cashflow with Lower Interest Rates

Cashflow is a very important part of the real estate investment world. There are a number ways to increase you cashflow on an investment "rental" property. Today I want to talk about the INTEREST RATE on your investment property and ways to reduce it to lower your payment and increase your cashflow.
Here are a few ways to lower your interest rate:

Shop at least 3 lenders - Make sure you are comparing apples to apples when you do this. Factor the same number of origination and discount and make sure the term is the exact same. The term is a 30 year fixed or 5/1 ARM interest only portion of your loan.

Buy-down your rate- You should only consider this if you plan to hold the property long term. These numbers are ball park, but will help illustrate: If you buy a $200,000 with 20% down at 7% your principle and interest payment would be $1064. If you buy-down your interest rate 2 points this would reduce your interest rate to 6.5% and your payment would be $1011. This would help you cashflow by $53 dollars a month. Now the tricky part, calculating you break even on your buy-down. 2% of $160,000 equals $3200. $3200 divided by $50 savings equals 64 months to breakeven. So what is the total savings if you held this property for 15 years? 15 x 12 months= 180 months 180x$50=$9000.00 $9000-3200=$5,800. Like I said this is a long term hold and over 15 years you would save $5800 interest payments. Keep in mind buy-downs are tax deductible.

Use of prepayment penalties- There are a number of loans that if you agree to take a prepayment penalty you are offered a lower rate. Generally the largest prepay is 3 years, this should only be considered if you are going to hold this home for that period. There is a severe penalty if you pay it off early, either 6 months interest or 3%. This can vary depending on the lender and type of loan you are looking for. Those individuals that are stated income or over $417,000 in loan amount will be the greatest effected, sometimes up to a full 1% savings on their interest rate.

Down payment- This is the one that has a double whammy effect. The more money you put down the lower the balance and the lower the interest rate. Once again, those individuals that can not document income this is the best way to cashflow properties via interest rate reductions.

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