Amortizing or interest-only loans: which is better?
Two of the wealthiest real estate developers I know always choose interest-only (IO) loans for as long as possible. Why? According to them, there are several reasons:
The lowest payment possible allows them a better chance to ride out a recession
Their goal is to control more real estate and benefit from inflation (e.g., controlling $1 billion and having it increase by 10%).
They can invest the money that they would have paid as principal pay down into higher-rate investments.
Commercial loans are typically due in 5, 7, or 10 years, so they never really get paid off.
However, if you're a small investor with only a few properties and that's your retirement plan, getting a 15-30 year amortized loan might be a good strategy. Different levels of investing require different strategies.
Our first two deals we locked in amortizing, and after then we've been going IO only.
Twitter Replies from others (THERE IS BILLIONS OF AUM IN THESE REPLIES)
"Your project generates $1. You pay that $1 to your lender as part of the amort. That $1 is not being paid to your LP. Your LP's IRR on unreturned capital is ticking at a higher rate than your unamortized loan. So you always want to use that $1 to pay down equity before debt" - John Otter
"Amortization is an insurance policy for the lender that’s sold as an insurance policy for the borrower. For a responsible borrower, IO is always superior." - Evan Rosenfeld
"I/O all the time. Can almost always get a higher rate of return on the income stream by reinvesting or paying down pref than by paying down your mortgage at X% rate" - Casey Lynch
"IO for life!" - Keith Wasserman
"Somebody framed paying down the principal as a "forced savings account." If you're building up for retirement, and can't generate returns elsewhere, principal paydown is safe and great. If not, you can potentially get higher returns investing that cash elsewhere." - John Blatchford
“I’m an IO enthusiast but make exceptions for lining up self-amortizing loans with equal term credits like grocery store leases” - Eric Weatherholtz