Mortgage on a rental

22 Replies

For most of you that do a buy and hold strategy... how long of a mortgage do you get and why? For instance, a 10 year, 15 year, 30 year?

My criteria for selection was that cash flow should pay off a 10 year mortgage with 20% down. So I took 10 year mortgages. I have a couple at 15 years but I pay them on a 10 year basis anyway. 

I would go with a 30 year loan. If it's a conventional loan, usually there is no prepayment penalty so what you can do is just simply make extra payments towards the principal to pay it down faster. Using a 30 year loan gives you a lower payment so that in the event that something happens and you need that extra money for something else, you will have it and still be able to pay your normal mortgage payment. It's true that going with a 10 year loan will save you on interest, but that's when compared to a 30 year loan that you spend all 30 years paying on. If you choose to pay it down in 10 years, then you'll have actually spent less in interest than a 10 year loan, plus you get that added security of being able to drop back down to the original payment amount if you need to.

I always go for the longest period possible. Makes for higher cash flows and good hedge on inflation. 

Ok, so basically you look for a 20- 30 year. Let the tenants pay the mortgage off for you. And enjoy the cash flow?

10 year.  

100 if I could get it.  My cash flow would go up.

Now, having said that, as an investor I would probably want to pay it off in 10 - 12 years if I can (the 100 year mortgage I wish I could get).  Then I would refinance and use the equity I just manufactured again.

Then pay that (again the 100 year I wish I could get) mortgage in 10 - 12 years, and re-use those funds again, and so on...

Joe Villeneuve
REcapSystem
A2REIC

I am mostly dealing with lower priced rentals and manufactured homes so mortgages are sort of like Chupacabra sightings.  Lots of talk about them but impossible to find one.  I have a 15 year fixed portfolio loan on one conventional house and two manufactured homes on 5 year fixed private money loans.  My other property was a cash deal and I have a cash deal offer out now for another.  I have been very disappointed in my small town bank's loan officer and will be checking around some others, but I am really thinking for under $50k properties cash is king.

Most of the 15 and 30 year mortgages in the US are backed by the government and have an artificially lower rate than the market.  There are limits on who can get these mortgages (US citizen, good credit, 2 years employment, etc.) and how many you can get (around 10 now i think).  

There are a lot of hoops to jump through to get these mortgages but it is best to lock in these historically low rates if possible.  One issue to consider, it is hard to get good deals if you are not paying cash. 

I feel that in the beginning a 30 year is best. As you gain more properties and lower down the equity. You will want to go down on the loan term or even focus on paying off the mortgage to clean up the books.

I HIGHLY recommend you stay with 30 if you plan on buying multiple. Our beginning plan was to get all the properties on 15 years, they had lower cash flow but they could pay for themselves so we were happy. Our goal was to have them pay themselves off in that amount of time so it seemed silly to not take a lower interest rate. Until we went to requalify for the next loan. We figured out really quickly that your ability to qualify was based on your ability to support the payments. There was No way we could support 10+ houses on 15 years at our incomes. So 30 years became the choice.

I think it depends on your strategy and goals. I use 30 year loans to minimize my payments as much as possible and maximize my cash flow. This allows me to buy another property sooner. I have no plans to attempt to pay off any of my properties any time soon and am more likely to sell them at some point in order to fund a new deal down the road. So my goal is to minimize payments.
If I was nearing retirement, my goal would be to pay off as many properties as possible in order to minimize debts and expenses during my retirement years. Let us know what you decide!

I think it depends on your strategy and goals. I use 30 year loans to minimize my payments as much as possible and maximize my cash flow. This allows me to buy another property sooner. I have no plans to attempt to pay off any of my properties any time soon and am more likely to sell them at some point in order to fund a new deal down the road. So my goal is to minimize payments.
If I was nearing retirement, my goal would be to pay off as many properties as possible in order to minimize debts and expenses during my retirement years. Let us know what you decide!

what happens when you have the maximum mortgages allowed by a bank? (Which that is where I am at, based on a few loan officers have told me)

What is the next means of financings method that I should consider?

Originally posted by @Brian Johnson :

what happens when you have the maximum mortgages allowed by a bank? (Which that is where I am at, based on a few loan officers have told me)

What is the next means of financings method that I should consider?

 Partners with good credit that can get more mortgages.

Joe Villeneuve
REcapSystem
AREIC

30 years.  Gives you flexibility to pay it off in 1-30 years if you choose.

I have enough to pay all cash, but i'm planning on buying and fixing all cash, and then doing a cash out re-fi and buy again. Thanks for the info.

Originally posted by @Joe Villeneuve :
Originally posted by @Brian Johnson:

what happens when you have the maximum mortgages allowed by a bank? (Which that is where I am at, based on a few loan officers have told me)

What is the next means of financings method that I should consider?

 Partners with good credit that can get more mortgages.

Joe Villeneuve
REcapSystem
AREIC

What about the route of looking for owner finance?  This is something I have been reading about on BP.  

@Brian Johnson  Owner financing works when it's available.  The seller has to owe no money or it doesn't.  Partners always work, when you can find them.  I find the odds of finding a partner much, much easier than finding a property that can be owner financed.

Joe Villeneuve
REcapSystem
AREIC

Joe, 

That is interesting advice.  So I assume to make a deal sweet for a invester you pay all the agreed down payment and a agreed interest rate to the investor. In tern the investor holds the deed for the agreed term.  that seems like the best and easiest offer.

Thank you for your input.

Brian, 

I think the opposite is more common! The way you sweeten the deal is you do all the work and find the deal. There are a lot of people that want to invest in real estate without any of the headaches. So the partnership is structured so they get the loan and pay the whole down payment, but the deed is  put in both your names and you split profits and expenses 50/50. Win-win for both parties!

A hard money loan works more like your example. In this case you're working with an investor more than a partner.

Originally posted by @Jacob Elbe :

Brian, 

I think the opposite is more common! The way you sweeten the deal is you do all the work and find the deal. There are a lot of people that want to invest in real estate without any of the headaches. So the partnership is structured so they get the loan and pay the whole down payment, but the deed is  put in both your names and you split profits and expenses 50/50. Win-win for both parties!

A hard money loan works more like your example. In this case you're working with an investor more than a partner.

 That sounds like a harder deal to sell but if that works it's better for me.  I thought the investor would rather be the second hand lender of the property.  That way they are free of any unexpected bills. 

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