Mortgages & Creative Financing

Forget Everything You Know: 15-Year Mortgages Are Best for New & Intermediate Investors

Expertise:
7 Articles Written
house key in woman hand and green leaves background

Everyone else on BiggerPockets is wrong.

That’s right, you read it here first.

Everyone. Even these guys:

"Personally, I prefer the 30-year mortgage, not only due to the flexibility, but also because I'm able to cash flow better with the lower monthly payment. Since I'm financing rental properties, my tenants are basically paying off the property, and I'm able to keep more of the cash flow due to depreciation." Dave Van Horn on the BiggerPockets Blog

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"Go with the 30-year mortgage, and especially so in this current market of low interest rates." Scott Trench on the BiggerPockets Blog

With one exception I will discuss in a moment, new and intermediate investors are better served by shorter amortization loans. There are several reasons why.

First and foremost, most investors should make an effort to build relationships with smaller, local banks. These banks generally only loan 15- or 20-year money and offer:

  • Quicker turnaround
  • Flexibility on credit score based on personal relationships
  • Knowledge of local markets
  • Networks of local attorneys, real estate agents, contractors, insurance agents, and other professionals
  • The option of cross pledging
  • Ability to keep money local

Private money and hard money sound great—but aren’t all they are cracked up to be. We aren’t talking about friends-and-family money but companies like CoreVest, LendingOne, Visio, or a brokered loan. Based on my recent experience, some of the challenges for this these loans include:

  • Funding can take as long as 60-90 days
  • Rigid processes
  • High expenses and/or broker fees
  • No cross pledging
  • Extensive documentation requirements
  • Requirement for excellent financial records

Competitive Advantage

Every single item I list for small bank relationships has been a competitive advantage at some point. Quick loan turnarounds let me ink deals that others ponder on. Having a loan officer who knows how to get things done in town is invaluable. That might be getting a repair made or knowing the best agent for flood insurance.

If an investor chooses—or maybe more accurately has to choose private money—the disadvantages can be significant. A partner and I were once trying to buy a six-plex. We spent over 90 days trying to get the deal closed. The private money processes were arduous.

We had an appraiser back out, a requirement for a property manager's policies and procedures book, lease reviews by third party legal specialists, and other issues. Not saying that these are necessarily bad—just that local banks don't have these burdens and are easier for the new or intermediate investor.

Related: What’s Better Financially: Paying Off Your Home Mortgage or Investing That Money?

Reinvestment

Lack of reinvestment profit is the basis for most objections to using 15- or 20-year loans. An investor doing a basic analysis might rationally opt for 10 to 15 percent real estate returns with a 30-year loan over the alternative 5 percent mortgage interest savings or 8 percent stock market gains.

But there is a fallacy in this logic—it implies that the cash flow disappears. That cash flow is not available for reinvestment. False news!

That investor has another option. They can use the equity in one property to buy another. This is called cross-collateralization and is possibly the most valuable advantage to using a small, local bank. Cross-collateralizing has two main benefits:

  • Additional investments can be made without any money out of pocket as long as you meet the bank’s loan-to-value requirements. These are typically 75-80%.
  • Reinvestment of both appreciation and loan principal reductions can be made in short turnaround times. New properties can be bought as often as a buyer likes.

This is exactly the method that I have used to grow to a $11M, 160-plus property portfolio in small-town, slow-growth communities. I mentioned above that a partner and I once worked with private money. It was the first and only loan of its type that I had—it was been an absolute pain. Everything else has been financed through a total of four small local banks except a single loan with a larger regional bank.

Awhile ago, I purchased 24 units in my hometown for $1.6M. Eight units were from one seller and 16 were from another. Because of my 10-plus year relationship with a small local bank, I could close this somewhat complex deal 45 days after the offers were accepted with no money out of pocket.

Other Benefits

Shorter amortizations have additional benefits. The first is that it is an automatic savings plan. It is difficult to go out and buy a new Jeep with money that is not in an operating account somewhere. This will help significantly when I am ready to retire. My plan is to sell a portion of my portfolio, pay down debt, and create the cash flow I will need.

Related: 3 Reasons to Consider NOT Paying Off Your Mortgage

The second benefit of this equity-build method is to provide a buffer in the event of an economic downturn. If any of the local economies in which I am invested swoon, I can refinance properties to longer amortizations, lowering my monthly payments.

Lastly, financing with shorter amortization loans imposes financial discipline. Buying only properties that cash flow to your personal target with a higher monthly payment ensures that an investor is not “reaching” for marginally profitable properties.

 An Important Exception

This is advice to my 25-year-old self: If possible, a new investor’s first purchase(s) should be a house hack using agency (FHA, VA, etc.) money. Buy as many units as you can this way, up to a fourplex at a time, up to the loan limits. Low down payment, 30-year amortization. Lather, rinse, repeat every two years.

Summing Up

Are shorter amortizations right for ALL situations? Of course not. But for the vast majority of the BiggerPockets non-expert level community, they are the right choice, and everyone who tells you differently is wrong. Even Dave and Scott.

Work with smaller local banks, and reap the long-term rewards.

What do you think about the 15-year vs. 30-year debate?

Comment below!

Depending on which day of the week it is, Jay is a 30-year oil and gas project manager and owner of about 160 rental units in three states. He harbors faint hopes of ditching corporate life someday...
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    Shawn Ginder Investor from Lititz, PA
    Replied about 2 years ago
    I am in favour of the 15 year for the purposes of faster debt pay down, quicker equity build up, and far less interest costs on the investment itself over the long term.
    Dave Toelkes Investor from Pawleys Island, South Carolina
    Replied 24 days ago
    If your tenants are paying the mortgage for you, why does the interest rate matter so much? My rental properties are largely self supporting, so I am getting the tax deduction for the mortgage interest my tenant is really paying. In this case, I would think the higher cash flow with a 30-year loan is more preferable. Just how I see it.
    Benjamin Stone
    Replied 21 days ago
    Since your tenants ARE in fact paying down the mortgage, why not get everything on a 15-year fixed (or hell, ten if you could find it!) and let them.pay them all down to zero.. and then in 15 years start refinancing them one per year. Pull out 80% of the equity and start another 15 year mortgage and go live on a beach somewhere. Repeat annually with each property in the order in which they were purchased/in which they amortize. Instant retirement (if you can be patient for a decade and a half).
    Charles Kennedy Rental Property Investor from Atlanta, GA
    Replied about 2 years ago
    I always enjoy seeing the flip side of arguments, but have to counter on a few points you’ve made: “The second benefit of this equity-build method is to provide a buffer in the event of an economic downturn. If any of the local economies in which I am invested swoon, I can refinance properties to longer amortizations, lowering my monthly payments.” I strongly disagree here. What is the risk in a downturn? The BIGGEST risk is that vacancy increases, rent decreases, etc. and suddenly you find yourself in a situation where you CANNOT MEET YOUR DEBT SERVICE. That would become a problem with a 15-year mortgage FAR before a 30-year mortgage, due to the higher payments in principal. Plus refinancing during a downturn when you are in presumably in a pinch will cost you $, and credit markets are generally going to be more stringent in requirements when a downturn comes. Also in terms of the savings plan argument – I think most people on BP are disciplined financially. I realize this a good method for the average american who is not focused on their finances and uses their house as a savings plan, but I’d argue the majority of readers/users/subscribers already have this part of their life in check. However, great article overall. It is never good to simply follow one way without considering the merits of another!
    Katie Rogers from Santa Barbara, California
    Replied 24 days ago
    One thing you can do in a downturn and it's free is recast your loan(s). Basically it means a new amortization schedule based on the lower outstanding principal and results in a lower with a lower PI. Careful about using the equity in property to buy another. If you do that often enough, you can create a house of cards wherein difficulty paying one of the mortgages has a cascading effect, and all the properties end up in default.
    Tony Kim Rental Property Investor from Los Angeles
    Replied 23 days ago
    LOL, if one finds themselves in a situation where you cannot meet your debt service, your answer is to recast your loan? If you had the ability to apply funds for a recast, why would you be unable to meet your debt service?
    Katie Rogers from Santa Barbara, California
    Replied 23 days ago
    You don't seem to know what a recast is. You don't need to apply any funds. It's entirely free. Perhaps you have it confused with loan modification programs. Your mocking tone is uncalled for. Here is an example: Let's say you have a $500,000 loan with a $2500 PI. Let's say you have already paid $100,000 of the principal, so $400,000 is outstanding. You can continue to pay on the same amortization schedule, and should because with every payment you pay off more principal. But if you are in a bind, you can get the loan recast. Now your PI is about $2000, freeing up $500 per month. So glad that you will never be in a bind.
    Tony Kim Rental Property Investor from Los Angeles
    Replied 23 days ago
    OK, sorry about my mocking tone. Admittedly, I'm not that familiar with a recast...but I am familiar with Mr. Google. I'm having trouble finding instances where a recast can be done without making a lump sum principal payment. Or am I mistaken? My impression is that even with a substantially lower principal balance, a payment is required before recasting. I understand that if you are already well into the loan, your PB will have gone done a bit and a re-amortization will result in lower payments. But, wouldn't that be relying on hoping that you will never be in a bind for at least several years? And also relying on your lender allowing a reamortization....let alone doing one without a principal payment?
    Katie Rogers from Santa Barbara, California
    Replied 22 days ago
    You don't have to make a lump-sum principal payment. some part of your regular payment goes to principal already. Once that amount begins to add up, you can get a recast. If during the good times you have been paying your 30-year fixed as if it were a 15-year fixed, you have been accumulating a greater amount toward principal, making the recast even more effective. When you shop around for a lender, make sure recasting ability is in the contract. As far as relying on good times, pretty much every loan is predicated on a continuance of the financial stability that obtained when the lender approved the loan. Contingency plans are always smart.
    Ryan Farrell from Baltimore, MD
    Replied 23 days ago
    @ people with 60+ AirBNB units when Covid shut them down.
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    Charles, Thanks for the thoughtful response. My experience and perceptions are built around the markets I am in. My investments go. back 20 years, so predate the downturn by several years. During and after the downturn, when the issues you mentioned should have arisen, it was business as usual for me. Here in my slow-growth hometown, property values did not run up just to crash. Local banks did not allow no-doc loans. We simply did not have the boom and bust. The story would certainly been different on the coasts or maybe in Las Vegas. This has work well for me – it’s a get rich slowly plan. Thanks Jay
    Phillip Gant Investor from Great neck , Ny
    Replied 24 days ago
    What markets are you in?
    Jay Strickler Investor from Ruston, LA
    Replied 21 days ago
    Small college town in North Louisiana and the MS Gulf Coast.
    Kevin Koffman Investor from Fort Lauderdale, Florida
    Replied about 2 years ago
    Getting a 15 year Mortgage was one of the best things I ever did. I sold the SFR after about 8 years of renting it out. It’s great IF you know you can easily afford the payments and/or have cash reserves. Time goes by so quick. It’s hard to believe. I would argue that a forced savings would help many people, even ones like myself who thought I didn’t need a 15 year loan. But, I tried it, I liked it.
    Edward Synicky Rental Property Investor from Yorba Linda, CA
    Replied about 2 years ago
    Terrible advise for any investor at any stage of the game. Go with the 30 fixed rate loans and pay them down at the 15 year amortization schedule if you feel it necessary. Keep your options open.
    Alan L. Coker New to Real Estate from Chandler, AZ
    Replied 23 days ago
    Interesting concept. What do you think about not just treating the 30 as a 15 but instead of paying that extra payment setting it aside for emergencies and do larger lump sum payments through out the life of the loan. Do you think this is a good idea? Or would it depend on situation?
    Rebecca Jackson Rental Property Investor from Dallas, TX
    Replied 24 days ago
    I totally agree. We are paying down our 30 year rentals on a faster amortization by choice, however keeping the flexibility to shift if necessary.
    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied almost 2 years ago
    I completely agree. A 30 year mortgage can be paid down with extra principal payments whenever you like. in fact, I make it a habit to pick a number bigger than the required payment, and autopay that amount. You can easily pay a 30 year mortgage in15 years! By simply paying the amount required to do that every month, With a 30 year mortgage, if you have a cash flow problem at any time in the future you can always make only the required payment. A 15 year mortgage does NOT give you the option to pay the lesser monthly payment of the 30 year mortgage. Instead, if you need lower monthly payments, you would have to refinance into a 30 year mortgage, and pay additional loan origination fees, and possibly points. this either takes cash out of your pocket, or increases your debt. Bad plan. Stick with the 30 year mortgage.
    Jay Strickler Investor from Ruston, LA
    Replied 20 days ago
    Would love to know where everyone is getting all this 30 year money without paying g really high fees or having to escrow a whole bunch of money. Just not available where I have looked (and have looked a LOT)
    Jeff Hubert Realtor from Fort Lauderdale, FL
    Replied 24 days ago
    Totally agree I make one to two extra payments a year and will pay down the mortgage in less than 17 years ... but still have the option to make the smaller 30 year mortgage payment !
    Thomas Breach
    Replied about 2 years ago
    Yes, I like the 30 yr as well still at these rates. But we’re missing the point-he’s saying in order to take advantage of local banks and their connections they require the 15 or 20 yr loan.
    Jay Strickler Investor from Ruston, LA
    Replied 20 days ago
    Bingo
    Daniel Ruiz
    Replied about 2 years ago
    What connection are you going to make at 15-20 fixed that you won’t make at 30 fixed? Credit unions and community banks have no issue with 30 fixed residential mortgages for investment properties. If you’re doing commercial loans, that’s a different discussion all together.
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    Daniel, I have not been able to find local credit unions or local banks in the last 20 years that will loan 30 year money. It just hasn’t been an option. I suspect that new investors would have the same experience. Only recently have I taken a loan out from a private money lender with a 30 year amortization. It was a pain in the butt and there is yield maintenance that should give an average investor pause. Thanks Jay
    Dave Toelkes Investor from Pawleys Island, South Carolina
    Replied 24 days ago
    Jay, I am a member of the Pentagon Federal Credit Union. They do offer 15 and 30 year mortgages but only on a primary residence. When I was about to become Medicare eligible, a free and clear primary residence became more important to me than a free and clear rental property. I refinanced my primary with a 30-year mortgage from PenFed to reduce my interest rate from 4.5% to 2.65% and paid it off in seven years. I am no longer in acquisition mode, but when I was, I always looked for portfolio lenders. Savings and Loans were the only portfolio lenders I could find in my market area. Now, even those institutions have been acquired by the larger banks.
    David Grabiner Investor from Chattanooga, TN
    Replied about 2 years ago
    @Jay. I understand the value of building relationships with local lenders, but why the 15 yr mortgage instead of the 20? Most local banks will do a 20 yr and I even have a local credit union that does a 30 amortization.
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    Response to David Grabiner (For some reason BP doesn’t have a Reply option at his comment): A 20 year amortization is how most of my loans are structured. In my article I wrote “15 or 20 year loans” under the Reinvestment section. Sorry for the confusion.
    Krishna Chava Specialist from Carrollton, TX
    Replied about 2 years ago
    Good article, Jay. I am also a fan of 15-year mortgages and have a 15-year loan on most of my 75 units. My main reason is forced savings that build equity faster. I am sure there are better ways of doing this, but, I have a day job and want to automate real estate planning as much as I can. Same reason I love mortgages that collect taxes every month from you and pay at the end of the year. This makes no sense as I am giving 0% loan to someone, but the convenience of it is worth the price.
    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied almost 2 years ago
    Mortgages have an autopay feature. You can easily force your savings using that without being locked into a higher monthly payment. And, on the subject of impound accounts that collect your property taxes and insurance and pay you zero interest on that money, I have to say that that makes zero sense to me. Instead, I autotransfer those funds (and my maintence, capex, and vacancy, and insurance reserves) every month into a reserves savings account that earns 2% interest. Then I pay the taxes twice a year myself.. I also prepay my insurance once a year, for a discount on my insurance costs. All of that adds up to hundreds of $ per year. Which I use as an extra principal payment on my highest interest mortgage. You are throwing money away for convenience. I only spend a few minutes a year on each property, and increase my net worth by a bit. Anything that does that is worth a few minutes in my book
    William Powers from Waukegan, Illinois
    Replied about 2 years ago
    Great article. I agree completely. All of the 250 units we have added to our portfolios are on 15 to 20 year AM with lower interest rates than the 25-30 year AM products. Shorter term loans force us to be financially responsible with our investments. Thanks for sharing.
    Marjorie Diaz
    Replied about 2 years ago
    Great idea! I?l be at my second year in August with my first property and I think that I?l head over to my credit union and see what they can do!! It? something I´ve been thinking of doing for some time.
    Chad Matthews Rental Property Investor from Philomath, OR
    Replied about 2 years ago
    Hi Jay – can you elaborate on the term “cross pledging” – I’m unfamiliar with it and don’t want to make assumptions. Beyond your specifics, I like the general idea of local. I have used a local lender for years and it allows me to be incredibly nimble. It is almost as easy as making 1 phone call to him, he makes the financing happen knowing my financials and details. I avoid hours of arduous paperwork (our time is worth money right!) and get great service. Second, he often saves me money over the “retail” rate because I am a frequent flyer. He has connected me to other excellent professionals in the real estate world from escrow agents to real estate folks. I don’t like to overpay and tend to be pretty conservative fiscally but the local folks can prove beneficial. Thanks for the article.
    Scott Sweeney Specialist from Oklahoma
    Replied about 2 years ago
    Cross collateralization is what Jay is describing. It’s the collateralizing of a property with equity on a new acquisition. Most local banks will allow this if they have first position on the property with equity AND will be doing the first on the new deal. Danger point would be a cascading failure in a soft rental market. This would be complicated by low absorbtion rates in slow/low growth communities.
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    What Scott wrote is correct – cross pledging or cross collateralization is using the equity in one property to buy an other. For example, if you own a rental on Elm Street that is worth $100,000 and only owe $50,000, you probably have about $25-30k of usable equity to buy that sexy 3/2 on Maple Street that you have had your eye on. If Miss Maple costs $100,000, you probably can get her for no money down depending on your banks LTV requirements.
    Alvin Sylvain from Los Angeles
    Replied about 2 years ago
    I do like the 30 year plan with a 15 year pre-pay schedule. That gives you the flexibility of switching from 15 to 30 should the need arise, without needing to file any paperwork with anyone. Then, switch back whenever you want to. Of course, if you can’t find a 30 year loan in your local market, that sorta removes the option anyway.
    Drew Kessler from Harpers Ferry, West Virginia
    Replied about 2 years ago
    30 years at a job and 160 rental units….when’s that retirement coming?
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    HA! Soon I hope – my goal for a long time has been able to have the assets to walk away at 55 if I choose to. I am 51 now. That steady paycheck and benefits are addictive though.
    Jake Snake
    Replied about 2 years ago
    Disagree with some of this. 1. Equity is illiquid dead money. The only place it makes sense to get a shorter loan is if you need a dedicated saving plan, or if the rates make financial sense. 2. A higher payment means you are on the hook for a higher payment, which implies a greater risk. 3. For a ‘newbie’, this advice doesn’t make sense, since a newbie is probably not buying an X-plex, and WOULD easily have access to a 30-year loan. 4. In my area, the ‘local’ banks often have much higher rates than global ones – they *might* have more flexibility, but it comes at a cost.
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    Jake, thank you for the comments. I can agree with you on point 1 if you are trying to sell a property and raise cash. However, I have repeatedly over two decades used equity build to buy additional properties. I have had maybe 60-75 transactions close and fully 2/3 of them have been without bringing money to the table. In my case, equity is hardly dead money. As I mentioned in a different reply, 30 year, local loans aren’t available. Also, banks here tend to take less risk with newer investors. Jay
    Colin March Rental Property Investor from Portland, ME
    Replied about 2 years ago
    I disagree 100%. A newbie often needs a larger cushion in cash flow to absorb some of the mistake they made in the underwriting process. Longer amortizations and lower monthly debt payments create a larger cushion. The “forced savings” argument is for people with no discipline–hopefully that doesn’t apply to BiggerPockets fans. Optionality and max leverage is very important and that is was longer amortizations create. If you are quickly paying down debt, that is fine, but you must re-lever the portfolio to sustain maximum ROE. Lastly, those local banks are easily providing 25 year amortizations at 80% LTV at 5% or lower these days. Who would not take that loan?
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    My one exception was a recommendation for newer investors to start with house hacking and taking advantage of 30-yr agency money. One of my sons is following this path. This is certainly a lower risk way to go.
    Michael Saberniak Rental Property Investor from Chatham, MI
    Replied almost 2 years ago
    If the difference in payment going from a 30 to a 15 year amortization will stress a newbie then I would say they have no business being in the rental business. (in most markets) The interest savings with the 15 year amortization are incredible, but then again that is what pays your salary working at a bank. 🙂
    Cody L. Rental Property Investor from San Diego, Ca
    Replied about 2 years ago
    Totally disagree. Here is why: Get a 30 year. Doing so allows you to make it a 15 year by simply paying extra principle (find out what your payment would be if you had a 15 year, and pay that much). But if you get a 15 year, you can’t pay less some month if you ever need to. The ONLY reason to get a 15 year over a 30 year is if there is some fundamental advantage in rate or other terms. i.e., 15 year at 3.5% vs. 30 year at 5% or something. Then, sure. But if it’s anywhere close (“close” might be different depending on the investor), get a 30 year all day. tl;dr: Get a 30 year vs. 15 as you can always make a 30 year a 15. You can’t make a 15 a 30.
    Joseph Walsh from Brookfield, Wisconsin
    Replied about 2 years ago
    One Con not mentioned here is the slower reserve build up. Making the assumption you put most/all your positive cash flow on a property into reserves until your target is hit (let’s say $10000) will take you nearly twice as long before you can truly start to “profit” from a property. Sure, in theory you pay down the loan faster, and could tap equity. Unless there is a downturn and now you are back down to 75% equity after a year or two. The alternative, get to that magic number, than start paying double payments if your true goal is equity gains. Additionally the cash flow number can be used as “income” for you next purchase. 15 year gives up some flexibility and options (I like options) and might also limit your exit avenues. However if you goal is equity gains, the lower rate plus faster pay down is hard to argue with. You just need more reserves going in.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied about 2 years ago
    It really depends. It effectively forces you to save, but it’s critical for the property to cash flow. On the coasts, it’s almost impossible for a 15-20 year amm to cash flow. In those cases, you really need a 30 year loan.
    Karl B. Rental Property Investor from Columbia, MO
    Replied about 2 years ago
    All my mortgages are 10-year. I hate the idea of paying thousands more in interest on a longer loan and since I buy well I still always cashflow.
    Jack Hildinger
    Replied about 2 years ago
    Hey Jay- This is a great article! However, I think the title should be “Big Lender or Local Bank? How Should You *REALLY* Finance your Investment Property?” I have a blend 30 year gov’t sponsored loans and local bank portfolio loans. I love them both for different reasons, most of which you discussed in the article. Good Job. -J
    Jerry W. Investor from Thermopolis, Wyoming
    Replied almost 2 years ago
    Jay, I have all of my loans in either 15 or 20 year loans. In my area neither local banks or credit unions will do 30 year loans unless you are going to live in them. I can often get a 30 day turnaround from offer to close with financing. Here is a strange quirk. if you buy a property using a 15 year loan and pay 20% down payment, at the end of 5 years you have almost exactly another 20% of equity. This has allowed me to buy a property with an 80% mortgage of purchase price. The seller takes a 20% second mortgage, with a 5 year balloon. At the end of 5 years I can refinance the extra 20% back and pay off the balloon. This allows for buying a property over 20 years with no money down. On another note I use cross collateralize as well. After I am 40% equity or higher I can buy a property and get a mortgage for the full price, not 80% if I give them a second mortgage on another property with enough equity to cover the down payment and still leave 80% equity. A final bonus is you don’t have your money in a bank account earning .25% interest while waiting for a deal. It sits in your mortgage as principal pay down then you draw it out as needed. It saves you 5% interest while it sits there because you are not paying the bank that money as interest.
    J. Mitchell Bernier Lender from Albany, GA
    Replied almost 2 years ago
    I could not agree more with this article. As someone who has worked for a large bank, with over 1200 locations, and now being with a more local community bank, it is clear that the local banks are more conducive to RE investing. The biggest advantage that Jay pointed out is with crossing collateral. I have used this in my own investing to allow me to purchase property with no money down and then refinancing to get cash out and free up collateral. I have been able to purchase multiple properties with no money by using my truck as a the extra collateral and I still get the same interest rate as someone who puts 15-25% down.
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied almost 2 years ago
    I like 15s on a case by case basis. Sometimes the rates are way less than 30s. At least check. I refinanced one to a 15 when rates fell. (No need to do a refi to shorten the term, just pay it like a 15 with additional principal payments, of course) Anyway, my cash-flow fell $92 per month, but will save me $180,000. Case by case. I’m glad you wrote this article Jay. Good to have discussions about something besides having your til death, I mean muertgage, not til death. Backed by other reasons than not having payments. Thats really nice by the way, no payments anymore on 19. Id bet the disagree-ers have not experienced that. I learned something from you and Jerry W above so thank you both!
    Karl B. Rental Property Investor from Columbia, MO
    Replied almost 2 years ago
    All of my loans are 10 years and under. Some investors scoff but it’s easy to pay them down when the properties are cashflowing like a beast.
    Chand Ramlakhan
    Replied over 1 year ago
    It’s nice also if you can do biweekly payments and have the principal credited when paid. I was able to do that with my credit union.
    Mike Alden
    Replied 10 months ago
    Quick question on cross collateralizing: is the main vehicle used to do this a HELOC or something else? I'm considering a 15 on my first purchase with 20%, which will be my primary residence, where cash flow is not a factor. Then use the equity to fund the down payment on my next REI purchase using a HELOC. Is this advisable?
    Jay Strickler Investor from Ruston, LA
    Replied 10 months ago
    Not a HELOC. There are no second mortgages or liens involve. The bank essentially pools everything together on multiple loans. I have had 7 or 8 separate loans with one bank that were used to buy properties over several years. The cumulative debt and all the properties pledged are in a sense all mixed together even though there is a separate repayment schedule for each loan.
    Brent Parsons Investor from Chalfont, Pennsylvania
    Replied 5 months ago
    I am in the process of building a 15 yr cash flowing & equity building machine! I loooooooooove 15 yr loans! Just look at the principal difference at the 120 month mark! I am not a very good saver but I am very good at finding and fixing discounted real estate thst can cash flow on a 15 yr schedule. I now have 12 rental units. 1 we own outright in a self directed Ira. 2 others are strong cash flow plays that have 30 yr notes to exploit pulling as much monthly cash flow out as possible. 1 of these is a college rental and 1 is in a D neighborhood but was bought super cheap. These homes together collectively cash flow $1610/mth pre maintenance! Which is great and all but the other 9 homes are where I’ll get wealthy in just a short 10-15 years. Each of these was done as a BRRRR and I’ve never invested more than 7-10k in a deal. On many occasions I’ve actually pulled 10-20k tax free out while still being in a very strong equity position of 25% or better and my cash flow ranges from $50-$525 per unit on these 15 yr plays. In just 12-14 years (I make extra payments on these 15’s occasionally too! ) I will have over $17,000 in gross monthly income (pre maintenance, taxes and insurance by just being disciplined and taking the harder road now) I’m still cash flowing about $3700/mth but what I truly love to calculate is how much equity I build each month. I currently build $6,800 in equity by just making my payments on these houses! I should also mention that I have a 15 yr on my primary residence and I pay an extra $93/mth which takes reduces this to a 13.4 yr loan! I don’t understand why there is so much focus on cash flow when the real wealth is created in equity building. And don’t get me wrong.. I love cash flow and expect to have lots of it in 13-14 years when I’ve paid off many of these houses and am 49-51 years old and ready to retire! People... go with 15 yr notes! Aim your cash flow to be $250 or more based on 15 yr amortization like I do and then let tenant selection and TIME do the heavy lifting. I truly can’t believe more people aren’t utilizing 15 yr loans at scale to simply have an amazing 10-15 year game plan.
    Jay Strickler Investor from Ruston, LA
    Replied 5 months ago
    Great story. I think over the long haul, 15 year mortgages with small, local lenders give the greatest amount of flexibility (counterintuitive, I know). At this particular juncture my relationships with these banks and the rapid equity pay down has been very useful.
    Caleb Christopher Rental Property Investor from Kansas City, KS
    Replied 25 days ago
    Love this. It forces better deals too, for cash flow! More room for error is good for noobs, and this may just save someone's hide who is naturally unrealistically optimistic.
    Jay Strickler Investor from Ruston, LA
    Replied 25 days ago
    Couldn’t agree more. Good luck:-)
    David Kurtzman
    Replied 24 days ago
    I like your logic and it has worked well for me over the years. However one might consider a 30 year loan if available with no prepayment penalty and then paying on a 15 or 20 year amortization and reverting back to the 30 year schedule when more cash flow is needed. That scenario requires the discipline you describe yet offers flexibility when needed.
    Gary Stevens
    Replied 24 days ago
    David, I agree. Take the 30 year if you can get it and pay it off in 15 years if you don't yet need the cash flow. If there is no prepay and most local banks do not have one, then you've covered yourself all around. Also, banks are more likely to lend to you since your income to debt ratios are better with the 30 year loan. When (not if) the downturn comes you can simply revert to the 30 year schedule. If you want to convert the loan when the downturn comes you may not be able to as banks tend to hold on to their money during these hard times especially if you have a higher vacancy rate and lower rents, you will be hard pressed to get that "hard times" 30 year loan. I've yet to find a bank (that doesn't have a prepay) that won't accept their money back on a 15 year schedule when you have a 30 year note. But they tend to frown if you try to make a 30 year payment on your 15 year note.
    Ryan Behm Rental Property Investor from SW Florida
    Replied 24 days ago
    Y’all watch this... https://youtu.be/BJ3xhjqk52A
    Tamar Hermes from Los Angeles, CA
    Replied 24 days ago
    @jay strickler I have done both and agree depending upon your circumstances, a 15 year has its advantages. That said, in this sort of economic environment, I am happy not to be overleveraged and a 30 year offers that safe haven. There is also an inflation play on 30 years. As the dollar continues to have less value, what will your money be worth in 30 years vs 15?
    Pete Sailhamer Investor from Windsor, WI
    Replied 24 days ago
    Sorry but this article is terrible advice. There are so many community bank/credit union lenders out there that if you can't find a 25 or 30-year am, you are not looking hard enough. A lot has changed in the past 20 years, small flexible lenders (which I also love) don't have to be local. Stay disciplined to use your extra cash flow wisely. Pay it down ahead of schedule if you want. If you need to force disciple on yourself by a 15-year mortgage, you might consider a different profession. "Forget everything you know".... No thanks.
    Scott Beall Investor
    Replied 24 days ago
    Can not disagree strongly enough particularly at these 30 year rates! A 30 year can be converted to a 15 (or anything in between) at any time and at ZERO cost (as opposed to refinancing - IF you can qualify) simply by paying more (or less) against principle. And - even more importantly - this can be done on a month to month basis as desired. When times are good, pay it down if you like. When times are bad, the flexibility could make all the difference.
    Joanna Ling Real Estate Agent from Arcadia, California
    Replied 24 days ago
    I thought it is a commercial loan if 4+ units. I haven't able to find a commercial loan of longer than 7 years. What bank or credit union offers 15 or 30 years?
    Seth Lofgreen
    Replied 24 days ago
    Lots of markets can barely cashflow a 30-year and a 15-year would be outright ridiculous.
    Jenning Yu Investor from Texas Invested in Several States
    Replied 24 days ago
    I think the main point that the author has made is because he had so many properties (over 160, and some are not 1~4 units which can use conventional loans), it is not possible and not easy for him to get so many conventicle 30 years loans. If 30 year loans were easy to make, probably the argument will be different.
    Mike Hinton Property Mgmt/Investor from Marietta, Ohio
    Replied 24 days ago
    Use the 15 yr loan as leverage. I couldn't think of paying all that interest for a 30 yr loan when I bought my first residence. Thankfully, a local banker told us on our first rental they wouldn't finance any longer than 15 yrs and I have used that to price every deal since then. Almost every deal looks breakeven at 15 yrs but we know our value adds and rent capacity to make it work. We have had to use 30 year mortgage in SW Florida where seasonal income is unpredictable. Not a lot of equity but nice place to visit. If you can't make it work in your market, find another market. Maximizing equity is the goal for us.
    John Teachout Rental Property Investor from Concord, GA
    Replied 24 days ago
    Dragging out this post from years ago was a bad move in my opinion. Since Covid 19, the lending landscape has changed a lot and many options with many lenders aren't even on the table anymore. LTV requirements have changed with most lenders, investment properties are difficult to get long term money for at all from many local banks. It's a changing financial world for sure. At the low interest rates and inevitable inflation due to printing a lot of money for stimulus, I think a 30 year (if you can even find one) makes a lot more sense nowadays than it did in the past. The interest spread is much smaller.
    Diana Pfieffer
    Replied 24 days ago
    Wow! You are getting a diverse response. We are new as rental investors, but live in a rural community. We do have a lot of vacation homes as well as the local regular residential homes, but a dearth of rentals available. Vacation rentals bring fast cash, so many opt for that. We have chosen to start building our rental business here locally where we have an established reputation. Like your article indicated the local bank limits mortgages to 20 years. Also, like you stated, we have an excellent relationship with a local banker who has indicated he will be very flexible with us. When I asked if he were a "portfolio" lender, he said, "no, but we will definitely work with you and your husband to get what you need." I was very encouraged by your article that we are on the right track for us. Clearly, those in other areas have other options which have different advantages. Thank you for your article.
    Diana Pfieffer
    Replied 24 days ago
    Oops. Re-read that. When I said "we have a lot of vacation homes as well as local residential homes", I did not mean WE (my husband & I) had them. I mean they exist in our community.
    Rebecca LeFevre
    Replied 24 days ago
    I had originally thought 15 year was the best. But, I’d been second guessing that and considering a 30 year. But after reading this, I’m back to my initial feeling that 15 year is the way to go! So thanks :) I like the point that the slightly higher payment forces us to get a property that is truly cash flowing, not to stretch for one that is made affordable by the lower monthly payment. There is that temptation to make the numbers look better than they are because I just like a property.
    Travis Jacobs Rental Property Investor from Las Vegas, NV
    Replied 24 days ago
    One great reason on why a 15 year is not smart is inflation. You miss out on 15 more years of paying down with cheaper dollars. (Get less bang for your buck). You could argue lower interest overtime but with 30 year fixed this low it's little difference. Also less time for tax benefits.
    Katie Rogers from Santa Barbara, California
    Replied 23 days ago
    I do not agree. On a mortgage calculator, https://www.bankrate.com/calculators/mortgages/loan-calculator.aspx $100K principal, 30-year, 4.5% Total interest paid =$82,000+ However, the total interest paid for a 15-year loan =$37,000+. The difference is about $45,000 or nearly half of the original principal. Even at a super low 3%, the difference is more than $27,000, or more than one-fourth the original principal. Of course the amounts scale up as the original principal scales up. This is not little.
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied 24 days ago
    So, based on the comments, BP decided to "freshen" this article up by putting a new date on it? Or were real changes made to the article? Hmmmm. Since we are currently in the middle of the Zombie Apocalypse, does this article make ANY sense to anyone? Might not the flexibility of the smaller payments of the 30 year mortgage be useful ? Out of curiosity, how in the heck, in the middle of Covid (and the accompanying chaos) would ANYONE in their right mind be suggesting that a 15 is "better" than a 30 year mortgages? CA just passed "no eviction" legislation that means that NO ONE can be evicted for the next 5 months if they pay 25% of their rent and sign a statement claiming" that their income has been "affected" by Covid. This is in addition to the eviction ban that has ALREADY been in place since this whole circus started. As it stands, in CA, beginning in FEBRUARY 2021, if a tenant the tenant hasn't paid, the landlord can go after them in small claims court. We all know how much income deadbeat tenants have in their accounts, so good luck collecting on any judgement (not to mention that in CA the back rent could easily exceed the limits of small claims courts, BTW). Brilliant. So, Adding "no small claims filed by previous landlord" to my renter screening criteria.
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied 24 days ago
    (Get the 30, print out the amortization table for the 15 and pay based on that....except when there is a once-every-100-years disaster and your tenants aren't paying their rent for a year).
    Katie Phan
    Replied 23 days ago
    Deanna Opgenort, I'm with you on that strategy. The rate aren't significantly different on 15 vs 30 year. The risk reward is so much better when you have the flexibility to pay 30 year payment or higher if you have extra. Furthermore, it's harder to qualify on a 15 year due to higher payments which then will limit your near term investment on other opportunities.
    Albert Ciampi
    Replied 23 days ago
    I agree with most of the article however I would caution not to waste your time with local banks and especially credit unions. Both have ridiculous low LTV requirements which I’m sure many of your readers don’t have. I worked as a Loan Officer for both and these financial institutions have they built in constraints not found in National Banks. Most of these banks love 1-4 unit transactions so they can turn around and sell them to Fannie/Freddie with the added bonus of not having to service them ( servicing loan portfolios are only cost effective when the portfolio reachable 1 billion) . As far as commercial real estate mortgages.... those with 5 or more units, retail properties, mobile home parks, office etc. they don’t have the expertise and decent mortgage products other that SBA type loans which are truly complicated to originate and produce a lower profit margin. I recently closed a small $275 K mortgage with Wells Fargo on a small 12 unit Class B building in 16 days from application with a decision and commitment in 2 days with a very favorable rate. Another resource I would recommend is Arbor Realty Trust if you need a 1 million + loan. They only do Multifamily property loans and don’t waste your time. You will know something right away. Once again at that loan amount they can get Fannie/Freddie Agency to purchase the loan or keep it in house to package and Securitized it for resale either thru private placement or on Wall Street . My advice would be to shop around not only for the best terms but find lenders who are geared up to do the underwriting in house and close expeditiously. The local community banks and credit unions just dint have the know how and in house resources.