Hey folks, Mo here 👋

When it comes to real estate investing, you need to know how to leverage creative financing strategies.

Conventional mortgages certainly have their place, but it pays to understand some alternative mortgage options as well.

Today, we’ll learn about:

• Reverse mortgages

• Bridge loans

• Blanket mortgages

• Interest Only Mortgages

• Adjustable Rate Mortgages

Reverse Mortgages: Tapping Home Equity in Retirement

If you’re a homeowner over 62 with limited cash flow but a paid off house, it’s hard to take out “trapped equity”. You can with a reverse mortgage.

Here’s how they work:

- You receive funds as a lump sum, line of credit, or monthly payments.

- You aren’t required to make monthly principal and interest payments.

- The loan isn’t repaid until you sell the home, move out permanently, or pass away.

- At that point, sale proceeds repay the lender. Any remaining equity goes to you or heirs.

This can be a useful way to supplement retirement income long-term. But run the numbers carefully, as origination fees and closing costs reduce net proceeds. Interest rates are also higher than traditional mortgages.

In today’s economy where the average mortgage rate is 8%, it may not make sense to take out a reverse mortgage.

Alternatives like home equity loans/lines allow tapping equity while preserving more for your estate. If staying put, renting out rooms can generate cash flow too.

Bottom line: Reverse mortgages require careful analysis to ensure they align with your retirement plans. Consult a financial advisor to review pros, cons, costs, and alternatives before moving forward.

Bridge Loans: Rapid Financing That Comes at a Cost

Sellers want buyers to move fast. Sometimes, traditional lenders will not lend on a property if it’s a heavy project, unstabilized, or it doesn’t tick their “buy box”.

The alternative is a bridge loan. Bridge loans promise speedy financing, but you’ll pay a steep price.

Here’s what to expect:

- 6 months to 3 years term, with lump sum repayment required.

- 70-80% of property value financed at double digit interest rates.

- Goal is to refinance or sell quickly to pay off the bridge loan.

While bridge loans deliver urgent capital, they carry huge risks:

- Rates from 10-15% cut deeply into returns & 2-3% origination points.

- Failure to repay within the term can mean default and financial disaster.

Bridge loans are only for extremely experienced investors with ironclad exit strategies. Take extreme caution before going down this high-stakes financing path.

Blanket Mortgages: Convenience with Cross-Default Risk

If juggling multiple mortgages across your investment properties keeps you up at night, a blanket mortgage can consolidate everything neatly under one loan.

The appeal lies in simplified loan administration and paperwork. Blanket mortgages can sometimes also secure a lower overall interest rate.

However, blanket mortgages come laden with significant risk in the form of cross-default provisions. Default on just one single property triggers default on the entire blanket loan.

Before pursuing a blanket mortgage:

• Only cross-collateralize your strongest and most stable assets.

• Analyze tradeoffs versus keeping properties financed on separate mortgages.

• Seek terms allowing you to release individual properties upon paying off their portion.

A blanket mortgage provides administrative convenience but also concentrated default exposure. Weigh carefully if benefits outweigh cross-default risks.

Interest-Only Mortgages

Interest-only mortgages allow deferring principal payments for an initial period, typically 5 or 10 years. You only pay the interest portion during this timeframe.

How Do They Work?

- Payments are lower as you only pay interest, not principal.

- Interest-only period often 5-10 years on a 30 year mortgage.

- Once interest-only period ends, payments jump significantly.

- Loan amortizes over remaining term. On a 5 year interest-only, payments amortize over next 25 years.

Key Benefits

- Frees up cash flow for investments since payments are lower.

- Useful for experienced investors doing short-term projects.

- Allows managing positive leverage on stable assets.

Watch Out for Downsides

- No equity built during interest-only term.

- Payment shock as principal payments kick in. Difficult to budget for spike.

- Rising rates magnify payment jumps.

- Higher default risk if exit strategy fails.

Interest-only mortgages provide cash flow flexibility for the right seasoned investors. But also introduce major repayment risks. Model worst-case payment scenarios before moving forward.

Conclusion

I hope you’ve enjoyed this brief and very high level introduction of debt. These are a few of the mechanics behind debt. The more you know about debt, the more tools you have in your tool belt to amass a huge portfolio.

If there’s anything else you’d like me to talk about, please feel free to email me.

Talk soon,

Mo