Christian OsgoodCEO, Multifamily Strategy · CEO at Multifamily Strategy

Monthly payments less than the interest rate?!?

5 Jan 2025 · 1 min

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1:11

Christian Osgood bought a 25-unit building in Stephenville, Texas for $2 million at 5% interest, but rents were too low to cover payments. He structured the loan so monthly payments were less than the interest owed for two years, adding the $50k shortfall to the principal. The trick preserved cash flow while he raised rents.

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First time I ever went to Stephenville, Texas, met the owner at this property when we were purchasing it. We were this close, this close to figuring out terms. Problem is he wanted this $2 million, which is a great price for 25 units down here, especially in this condition. He wanted $2 million and he wanted 5% interest. Here's the problem. Did not cash flow day one. His rents were just too low. They're way below market. And while that's fine, I can't buy a deal that loses money. I'll never do that. Every time you buy a deal, if it pays you, you can buy another deal and another deal and keep increasing your income. Here's what we did. We actually did what's called a reverse AMM. We had no problem with the price. In fact, I would have been willing to pay more. The first 2 years, we actually add to the principal. Our payments are less than our 5% interest only. However, what this did is allowed us to bank money and continue to cash flow through the property. With this, we added about $50,000 total to the price of the building. So now instead of it being like $2 million, it's $2,050,000. Of course, I would have paid more for the building originally, but that's how you do the math for these. Is this the right tool for every deal? No, but what a simple fix to an easy deal. If you're looking to do creative finance, almost every single time, the simple answer is the correct one. Buy it on long-term cash-flowing fixed-rate debt. If it doesn't do it, figure out the simplest way to get it there.