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

by | BiggerPockets.com

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, BiggerPockets Blog, January 5, 2017

“Go with the 30-year mortgage, and especially so in this current market of low interest rates.” Scott Trench, BiggerPockets Blog, July 28, 2018

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

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

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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 are trying to buy a 6-plex right now and are over 90 days trying to get the deal closed. The private money processes have been arduous. We have 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 10-15% real estate returns with a 30-year loan over the alternative 5% mortgage interest savings or 8% 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+ property portfolio in small-town, slow-growth communities. I mentioned above that a partner and I are working with private money right now. That will be the first and only loan of its type that I will have—and it has been an absolute pain. Everything else is financed through a total of four small local banks except a single loan with a larger regional bank.

In December 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+ 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 4-plex 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.

We’re republishing this article to help out our newer readers.

Your turn to weigh in: What do you think about the 15-year vs. 30-year debate?

Comment below!

About Author

Jay Strickler

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 to travel and spend more time with family and friends.

36 Comments

  1. Charles Kennedy

    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!

    • Jay Strickler

      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

  2. Kevin Koffman

    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.

      • Daniel Rutherford

        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

          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

        • David Grabiner

          @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

          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.

    • Cindy Larsen

      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.

  3. Krishna Chava

    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

      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

  4. William Powers

    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.

  5. chad matthews

    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

      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

      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.

  6. Alvin Sylvain

    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.

  7. jake snake

    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

      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

  8. Colin March

    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?

    • Michael Saberniak

      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. 🙂

  9. Cody L.

    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.

  10. Joseph Walsh

    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.

  11. Jack Hildinger

    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

  12. Jerry W.

    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.

  13. J. Mitchell Bernier

    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.

  14. Steve Vaughan

    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!

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