Principle & Interest vs. Interest Only

[bluelabel]

Hello,

Alot of investors in real estate seem to go with interest only loans and i want to ask, why is this?

Personaly i can not see the benefit, i am of the opinion the you pay principle as well as to get equity in the property so you can leverage to buy more property.

The only plus i can see from Interest only is that your repayments are kept low so the return is higher, however at the end you dont own the property, which is the goal, i thought. Sure capital gain comes into it, but that would be riskier wouldnt it, especially in the current climate.

Reading and asking people has not been able to give a direct answet. Can anyone shed some light on this?

:confused:

blue

[2BAD4U]

Tax and cash flow.

Obviously with interest only you claim alot more in tax in the long run. Secondly, if the difference in payments between P&I v's Interest only is put towards reducing another high interest / value debt (such as your own mortgage) then what you save can offset the extra interest of an interest only investment. What tax bracket you are in can make a big difference also.

With interest only, once your first property goes positive, then you should be able to buy a second on interest only. With P&I your cash flow would be less and may limit your ability to buy another investment.

I did some quick sums on a 30 year loan, 6%, $300k and 4% annual growth and in the highest tax bracket, the end result was very similar net profits (providing the extra cash was invested).

One last consideration is piece of mind. When I bought my first property on interest only it meant my monthly commitment was less and enabled me to maintain my lifestyle choices (bit like taking a loan to go on a holiday but in reverse). In my case I am relying solely on capital growth.