Interest-Only Loan

An interest-only loan lets the borrower pay just the interest for an agreed number of years, so the principal stays where it started. The payment is lower than an amortizing loan of the same size, which leaves more of the NOI as cash flow. The balance does not fall during the interest-only period.

Interest only on $375,000 at 7.25% is about $27,188 a year. Against the default house's $28,892 of NOI, that leaves about $1,700 of cash flow and a coverage ratio of about 1.06. The amortizing payment on the same loan would leave the property short.

The lower payment does not make the property earn more, since NOI is unchanged. When the interest-only period ends, the payment rises, sometimes sharply. Check that the NOI you expect at that point will cover the higher amortizing payment.