By Jodi Summers

When last we met, you read about identifying fixer properties with the greatest profit potential, and we noted how, using Internal Revenue Code 121, you can fix and flip your primary residence every 24 months, without limit, as per your accountant’s advice. This week, we’d like to enlighten you to ways to pay for these properties with the least out of pocket expense.

A major advantage of becoming a “serial home seller” is that you qualify for owner-occupant mortgage financing from conventional lenders. An experienced loan agent will know an array of exotic loans that might suit your 24-month hold plus sell objective. Your loan officer will have the skinny on adjustable-rate mortgages (ARMs), which have lower payments in the early years than fixed-rate mortgages (FRMs). Among different types of ARMs, those with a short initial rate period have lower initial rates and payments than those with longer initial rate periods, but carry greater risk of future rate and payment increases.

In the U.S. 40-year mortgages recently became popular in the sub-prime category, loans for consumers with blemished credit.

“We’ve seen 45-year mortgages being offered,” reveals Mark Douglass, a senior director at Fitch Ratings, which analyzes risk for investors. “It’s rather early to say whether [the 45-year loan] will become as popular as the 40-year … [but] there’s good reason to believe that the 45s will catch on, to some extent.”

Stretching out the amortization means a smaller monthly payment. A 30-year, $100,000 mortgage, for instance, at 6.5 percent, carries a monthly tab of about $632. The amount drops to $585 on a 40-year mortgage, $573 at 45 years.

“One of the things that the 40s or 45s or 50s have going for them is that you don’t have the same kind of payment shock that you have with an option adjustable rate mortgage or an interest-only loan,” validates Douglass.

Interest-only and adjustable-rate mortgages are both well suited for 24-month holds. Many FRM and ARM programs now offer an interest-only (IO) option on which the borrower need only pay interest for up to 10 years. But lenders charge a higher rate (or points) for the option, and payments in the later years are larger.

Another option is 100 percent financing. This is available only if you meet the following criteria —

(1) A FICO (Fair, Isaac Corp.) credit score of 700 or higher, and

(2) good income.

“Given the prices of various mortgages in the market, your selection of a mortgage type (including an IO option) should be governed by: 1) Your time horizon — how long you expect to have the mortgage, and how certain you are about it; 2) Your preference (if any) for low required payments in the early years of the loan; and 3) Your tolerance for the risk of higher interest rates and payments in the future,” observes Jack Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania.

A loan for the rich is a pledged-asset mortgage. Offered by big brokerage houses, these loans allow affluent borrowers to leverage their investment portfolios as a guarantee for a loan.

Clients “want to be able to buy a home without having to liquidate assets and alter their investment strategy,” said Richard Musci, chief lending products officer at Charles Schwab Bank, which recently began offering 100 percent financing to clients with portfolios of $250,000 or more.

A Delayed-Payment Mortgage is structured as such: For the initial six months, pay nothing. For the next 9 1/2 years, pay only the interest. Then, for the final 20 years, the loan is fully amortized — payments are based on the entire loan balance — until maturity.

Pay-Option Loans allow borrowers four different choices every month.

To finance the cost of the improvements, a home equity credit line is usually the least expensive and easiest to obtain.

Thanks to Internal Revenue Code 121, fix-up profits home profits can be tax-free when the principal residence is sold. You can fix and flip your primary residence every 24 months, without limit.

And you thought your friends who were always getting new cars were cool.

Jodi Summers is Director of the Investment Division at Boardwalk Realty. For your real estate needs, e-mail Jodi Summers at jodis@boardwalkrealty.com, or call (310) 309-4219. Visit her Web sites at www.SoCalInvestmentRealEstate.com or www.santamonicalandmarks.com.