Rental real estate strategy with 3k monthly savings 15 year loans

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I wanna pick some brains here... .. Im saving 3k monthly I have 1 single home property on loan cashflowing 200$ after expenses on 15 year loan.... (self managed) ...

My goal is to Be financially free 15 years down the road(or sooner) which is why i put this first property on 15 year note ..

My main concern is should i go 15 year loans / equity loans / 30 year loans / brrrr method ... for sure though i am a buy and hold mentakikty no flipping here i run/ own a restaurant dont have time for that

I would really like to have a number of loans paid off withing 15 years (15,000$or more cash flow)... I know the term dead money using shorter terms but i do not mind having loans paid off earlier vs 30 year loan even if it means less cash flow i do not need to live off of it now if it means loans getting paid sooner

Again i am new to the game spending lots of time on bigger pockets and listening to podcasts daily ,, go easy on me :)

Its good that you're thinking about this.

15 year loans save money in the long run, but they reduce cashflow.  I am still in an acquisition mode so I want more cashflow now so I can buy my next property every year, so I choose 30 year loans (for 4 or less units).  I also think that interest rates and inflation will likely rise in the future, so a longer term loan will benefit from that as well.

You may appreciate this article by @Scott Trench .  30 or 15

15 year loans lose cash flow...and lose money since the source of the money that shortens the loan comes from you.  This is a really, really basic math formula.  where I find many don't understand is what qualifies the plus/minus numbers.  

Cost is negative...it's that simple.  The confusion is in the "cost".  Interest charges are not cost by virtue of being an interest charge.  They are a cost based on who pays to interest charge, and are a cost ONLY to that person.

If you have positive CF, meaning the rent is paying all the expenses (including the mortgage/interest payment), then the REI isn't the one paying the interest charge...the TENANT is. That's their job. When we help them, by paying mortgages off faster than we need to, we are now helping the tenant buy the property for us...and helping them pay the interest charge in the process.

When we have negative cash flow, we are REALLY paying a lot more than needed for the property.

What does the property cost us when we buy a property?  Whatever comes out of our pocket.  The minimum is usually the down payment.  Anything we add to that, is money WE are spending unnecessarily.  If the only money that came out of our pocket was the DP, then that's ALL the property cost us to buy.

We have to recover all of our cost before we made any profit.  The less we spend on a property, the sooner we start making a profit.  If I had a property that the total cost was $100k, and I put up a down payment of $20k, and that property had $500 CF/Mo ($6k/yr), I would start seeing a profit after 40 months, and I would have paid only $20k for the property.

On the other hand, if on that same property, I had a 15 year mortgage, but my CF was reduced to $200/month, it would take me 100 months to recover my money...and start making a profit.

3 years and 4 months vs. 8 years and 4 months.  

OK. You say "I have the property paid off in 15 years though", and I say "so what".  Why?  Liquidity...and the power of compounding future investments with the 30 year mortgage, that you don't have with the 15.

Example:

30 year mortgages - 

3 years 4 months, CF = $20k accumulated.  Take that and invest it into the next deal...just like the first deal.  This means you now have $1000/month, and only 20 months (1 year and 8 months) to accumulate the next $20k.

1 year and 8 months later (5 years total), take your new $20k and buy another property just like the first two.  Now you have $1500/month ($18,000/year).  So, in 1 year and 1 month and a few days (total of 6 years +), you can buy another property...again, just like the first 3.  You now have $2000/month ($24k/yr).  So in 10 months ....if you extrapolate this out to 8 years and 7 months, CF = $4,000/month ($48k/year)

15 year mortgages

8 years and 4 months, CF = $20k accumulated, buy property #2 and double your CF,,,$400/month, and...need I go any further?

$4000/month vs. $400/month....????

I started doing 15s in 2012.  Then the rate of a 15 was 30% less than a 30 and I was 9 yrs in with 3 dozen rentals.  I wasn't looking to expand anymore. I was getting two-family fixed 15yr loans for 3.375% and absolutely refinanced everything I could.  I was used to 6.5% 30yr in early 2000s.

A house with a 15yr loan is fixed at what, 4?  I've paid off plenty, but all were above 6% and/or loans with calls or private sellers.  

You will have a hard time acquiring up to $15k per month cf if you pay off low interest loans that don't bother you as you go.  Id acquire as much as possible and pay them off when you hit your portfolio goal.  $15k per month is probably $3M in a cash-flowing market, $5M in mine.

Originally posted by @Steve Vaughan :

I started doing 15s in 2012.  Then the rate of a 15 was 30% less than a 30 and I was 9 yrs in with 3 dozen rentals.  I wasn't looking to expand anymore. I was getting two-family fixed 15yr loans for 3.375% and absolutely refinanced everything I could.  I was used to 6.5% 30yr in early 2000s.

A house with a 15yr loan is fixed at what, 4?  I've paid off plenty, but all were above 6% and/or loans with calls or private sellers.  

You will have a hard time acquiring up to $15k per month cf if you pay off low interest loans that don't bother you as you go.  Id acquire as much as possible and pay them off when you hit your portfolio goal.  $15k per month is probably $3M in a cash-flowing market, $5M in mine.

 Nice! I have 3k a month from my own money im saving which will probably be buying a house every 7-8 months and any positiv cash flow will compound withmy 3 k savings to aquisition more property earlier and if i find a larger multi 4 or higher property ill probably do a 30year on that for sure on that for the cash flow and expected expenses

Rumor is market is peaking out in my town or so say the realtors i have talked to , sales are slowing so we should start seeing better deals which im ready for

My thing on 15s is if stuff hits the fan and markets fall or rental markets fall ill have it easier with paid propertys then lots of debt that ill have to hold on for 15 more years 

Once i have that free equity i could start doing large multi’s (or earlier)

Originally posted by @Jorge Leon Jr :
Originally posted by @Steve Vaughan:

I started doing 15s in 2012.  Then the rate of a 15 was 30% less than a 30 and I was 9 yrs in with 3 dozen rentals.  I wasn't looking to expand anymore. I was getting two-family fixed 15yr loans for 3.375% and absolutely refinanced everything I could.  I was used to 6.5% 30yr in early 2000s.

A house with a 15yr loan is fixed at what, 4?  I've paid off plenty, but all were above 6% and/or loans with calls or private sellers.  

You will have a hard time acquiring up to $15k per month cf if you pay off low interest loans that don't bother you as you go.  Id acquire as much as possible and pay them off when you hit your portfolio goal.  $15k per month is probably $3M in a cash-flowing market, $5M in mine.

 Nice! I have 3k a month from my own money im saving which will probably be buying a house every 7-8 months and any positiv cash flow will compound withmy 3 k savings to aquisition more property earlier and if i find a larger multi 4 or higher property ill probably do a 30year on that for sure on that for the cash flow and expected expenses

Rumor is market is peaking out in my town or so say the realtors i have talked to , sales are slowing so we should start seeing better deals which im ready for

My thing on 15s is if stuff hits the fan and markets fall or rental markets fall ill have it easier with paid propertys then lots of debt that ill have to hold on for 15 more years 

Once i have that free equity i could start doing large multi’s (or earlier)

 You appear to be so focused on the fast payoff, that you've lost  sight of exactly how you are doing it, and the overall impact it has.  You're picking out pieces of your plan...what you see as the good ones, and completely ignoring the impact those pieces are having on what surrounds those positive pieces.  Best of luck Jorge. 

@Joe Villeneuve Many people struggle to grasp the time value and risk management aspects of payoff vs. cashout. I saw a spreadsheet once that showed how money worked over time. It showed cashflow, CapEx, interest, taxes, rent (with 3% increases) over 30 or 40 years. It also included estimated (calculated) ROI, etc. For people who are choosing a more conservative path, this helps. You can add rows that show your own family, career, and investment goals or plans. In other words, if someone wants to find only a handful of deals to supplement life goals, rather than go full tilt into RE investing, they can see how it fits THEIR plan. Plenty want to dive in deep and retire off of real estate in a few years. Others, just want to have a little extra cash or cash flow later in life. If they want to keep their current career path, and time the increased cashflow with retirement, kids college, or anything else, they can plot the payoff against that date. Don’t beat me up, I know the pros (except Dave Ramsey) say leverage leverage leverage. Im In favor of havIng at least one property paid off completely as a security blanket. The advantage of seeing how a property cash flows over time is also seeing an exit point. Many take the ugly house and fix it up. Wouldn’t it be nice to rent it while CapEx is low? If you just did the roof and AC, how about not having to factor that into your CapEx?
@Douglas Pollock. I forgot to add something. For the sake of comparing payoff vs cashout, comparing the yearly cash flow, ROI, COC, etc against what that equity does while having 2nd, 3rd, 4th, etc properties would absolutely give all newcomers something to ponder. Personally, I think finding, financing, buying, rehabbing, and either selling or renting a house is easy to learn. The hard part is determining how to work your money over time. Time value of money, comparing investment vehicles, etc are tougher.
Originally posted by @Douglas Pollock :
@Douglas Pollock. I forgot to add something. For the sake of comparing payoff vs cashout, comparing the yearly cash flow, ROI, COC, etc against what that equity does while having 2nd, 3rd, 4th, etc properties would absolutely give all newcomers something to ponder. Personally, I think finding, financing, buying, rehabbing, and either selling or renting a house is easy to learn. The hard part is determining how to work your money over time. Time value of money, comparing investment vehicles, etc are tougher.

 Two things to add:

1 - Way too many people have no understanding at all how money works.  If they did, they would understand the importance of this number sequence:  1073741824

2 - Way too many REI were 100% correct when they were in their math classes, complaining about why they had to learn math since "they were never going to use it".

@Jorge Leon Jr You’re really overthinking this a lot I think. Right now the rate difference is roughly 4.375 for 15 and 4.75 for 30 year fixed (owner occupied, 740 above credit). Take the higher rate when starting and buy on 15 year notes if you want to down the road. I’ll probably do that once I’m at 10 plus properties. You can always pay off a 30 year note quicker if you want. I commented on your last thread about buying 100 rentals. Just go buy a rental with 30 year financing first and then think about this stuff. By time you get this all sorted out I’ll have bought 3 more rentals. BTW before you add another thread about a LLC, no you don’t need one.

what about this for my next property ill do a 30 year note lets assume im cash flowing 500$ (After all expenses)

Would yall take half and save it for another property like adding it to my 3k monthly savings (that i plan to buy properties with)

And the other half 250$ and add that to principal payment every month?

My main concern as im beginning investing is oweing too much money and the markets/economy/rentals crash 5-20 years from now i want a safe pillow (paid off properties) to land on just incase

Hell if the restaurant i run slows down too

@Jorge Leon Jr

You would make more cash flow if you invested your 3K monthly into a mutual/income fund than investing in real estate with a 15 year plan to pay them off.

The return on dead equity maxes out at the prevailing mortgage interest rate. That is barley worth the bother to invest in the hassles of real estate. Your 3K invested monthly in a fund will easily average 10% long term and you keep rolling the income back into the fund until you need the income. It will far exceed the income from rentals and will be truly passive.

Paying down a mortgage in a rental is akin to hoarding as opposed to investing. You are parking money you have absolutely no use for and value at about 4% out of 10%.

Originally posted by @Jorge Leon Jr :

what about this for my next property ill do a 30 year note lets assume im cash flowing 500$ (After all expenses)

Would yall take half and save it for another property like adding it to my 3k monthly savings (that i plan to buy properties with)

And the other half 250$ and add that to principal payment every month?

My main concern as im beginning investing is oweing too much money and the markets/economy/rentals crash 5-20 years from now i want a safe pillow (paid off properties) to land on just incase

Hell if the restaurant i run slows down too

 No.  For all the reasons I've already mentioned.

Question 1:  Why are you so concerned about having properties paid off if the economy crashes?  You group Markets/economy/rentals together, and you shouldn't.  The three things react differently...in some cases in opposite directions.

Question 2:  How will a paid off property be better than one that isn't paid off if the economy crashes?

Question #3:  If the economy does crash, wouldn't a higher cash flow be better?

Originally posted by @Joe Villeneuve :
Originally posted by @Jorge Leon Jr:

what about this for my next property ill do a 30 year note lets assume im cash flowing 500$ (After all expenses)

Would yall take half and save it for another property like adding it to my 3k monthly savings (that i plan to buy properties with)

And the other half 250$ and add that to principal payment every month?

My main concern as im beginning investing is oweing too much money and the markets/economy/rentals crash 5-20 years from now i want a safe pillow (paid off properties) to land on just incase

Hell if the restaurant i run slows down too

 No.  For all the reasons I've already mentioned.

Question 1:  Why are you so concerned about having properties paid off if the economy crashes?  You group Markets/economy/rentals together, and you shouldn't.  The three things react differently...in some cases in opposite directions.

Question 2:  How will a paid off property be better than one that isn't paid off if the economy crashes?

Question #3:  If the economy does crash, wouldn't a higher cash flow be better?

I want paid off properties just in case for whatever the future brings if i cant rent out half the properties i dont want to be stuck on paying the bill (this is saying like something bad bad happening in the future) and for whatever reason i have to sell the restaurant i dont have to worry about debt as much

Seriously like if ***** hits the fan imagine having all these loans and not being able to pay em

If economy crashes i cant charge that much rent or rent at all who knows

It may sound unrealistic but its a fear/concern i have

Imagine if half the properties are paid for ill have twice as much more cashflow thats what my eyes see

Not every investor makes it just wanna be safe here i know i know 

the greater the risk the greater the reward 

and vice versa

Jorge,

You probably aren’t going to get a lot of support here with being conservative.  A lot of people on this site seem to be “all in” on maxing out leverage.  Maxing out leverage makes sense as long as everything goes as planned.  Many times it doesn’t go as planned. Some people can sleep at night leveraged to the hilt, others worry so much that they analyze to death and never end up buying a property. Do what’s right for you.

@Jorge Leon Jr . I don’t think there is a wrong answer here, it’s all about your strategy to achieve your goals. We recently refinanced a home I’ve owned for 16 years, I had a really hard time not doing a 15-year as I’d love to get it paid off. However, we want to by a more properties and want the flexibility to adjust rents during market downturns if needed so we want with a 30 year loan. I do pay a couple hundred dollars extra to principal to keep chipping away at the loan as we do not live on this money but rather to get us to FI. Good luck!
Originally posted by @George M. :

Jorge,

You probably aren’t going to get a lot of support here with being conservative.  A lot of people on this site seem to be “all in” on maxing out leverage.  Maxing out leverage makes sense as long as everything goes as planned.  Many times it doesn’t go as planned. Some people can sleep at night leveraged to the hilt, others worry so much that they analyze to death and never end up buying a property. Do what’s right for you.

Honestly what im seeing this is my second post and first post was getting bashed on about dead money

Everything doesnt go to plan 

I appreciate your input

If i had $500k+ worth free untied payed off properties well maybe yea max out leverage but at the beginning i dont think i would be able to sleep at all having 1million plus in debt plus im 25 years old yea i have time but still wanna play it safe

Hey Jorge.  Members are not bashing your posts.  They are trying to help you understand the following:

  1. Paying off a loan very quickly and then immediately refinancing it to purchase other properties accomplishes nothing
  2. #1 is the same thing as not paying off the first loan and just using accumulated savings to purchase other properties
  3. Wanting to scale quickly and wanting to own properties free and clear quickly are two polar opposite goals
  4. 15 year mortgages are MORE (not less) risky than 30 year mortgages.  If you are buying properties where you are concerned with extended vacancy and have 15 year mortgage payments, you will have a lot of negative cash flow to cover.

It's hard to provide advice with your conflicting goals.  Maybe just keep doing what you are doing...keep saving well, use 15 year mortgages, and keep reserves...and sleep well at night.

Hi Jorge. Nice job getting in the game. Your post tells me that you are well on your way because you are able to delay gratification, set goals, and patiently pursue strong financial positions. 15 yr loans will always cost you more monthly but less overall. Of course, consider the value of money that would stay in your pocket with 30 year loans and consider what you may be able to do with that additional cash. For simplicity sake, if you can afford 1 property on 15 yr loan or 2 properties with 30 yr mortgages you double your growth potential (and loss potential) with 2 properties (last year I bought 2 properties with 30 yr fixed loans - both have cash flowed and gained more than 50K in equity. Because I went 30 year I was able to afford more. Both properties cover the mortgage and then some and I've had the bonus of doubling appreciation and buying down 2 mortgages vs 1 and realizing the depreciation benefit of both properties)- for me the question is the end goal and your risk tolerance. As we use to say on the farm "there is more than one way to skin a cat" (yes ... that is a disturbing phrase and no ... we never skinned cats!). Best of luck with your journey.

Originally posted by @Jorge Leon Jr :
Originally posted by @George M.:

Jorge,

You probably aren’t going to get a lot of support here with being conservative.  A lot of people on this site seem to be “all in” on maxing out leverage.  Maxing out leverage makes sense as long as everything goes as planned.  Many times it doesn’t go as planned. Some people can sleep at night leveraged to the hilt, others worry so much that they analyze to death and never end up buying a property. Do what’s right for you.

Honestly what im seeing this is my second post and first post was getting bashed on about dead money


Hi Jorge.  No one is "bashing" your post.  Rather, what you're seeing is how BP was designed to work.  

People are offering their advice based on a wealth of experience. I've wrestled with the same conflict you're feeling when someone counters your strategy. Unfortunatley, I learned the hard way because I didn't join BP until I was well into REI. I'd give my eye teeth to have had the type of feedback and advice you're getting here when I first started. I realize now that I could have been much further into my portfolio development if I had this type of advice to glean from during the early days.

As for the 15 vs 30 year issue.  Its important to go with the 30 year because of the exact same reasons Joe and others are advising.  You may not realize it now, but it will become evident later on. 

Good luck!

@Jorge Leon Jr Why not do both? The rate difference between 15 and 30 is minimal these days and both are very low historically. I would get a 30 years mortgage and pay it with a 15 years payment (meaning, you'll add to monthly principal payment) - you'll achieve your goals of paying it off sooner, but you'll also have the option to go to minimum principal payment required if you need to or change your strategy later. And I would pay extra till I reverse the principal-interest ratio (at the beginning is 95% interest), and then I would just let it ride. Or do a portfolio loan, and get some more properties.

"I want paid off properties just in case for whatever the future brings"

"JUST IN CASE FOR WHATEVER" …. My impression is that you are NOT risk tolerant and my advice would be to stay away from real estate investing. It is always high risk and attempting to achieve your present goals and sleep at night are not compatible in this game.

You will not achieve the security you want without jeopardising your ultimate goals.  Realistically you would be farther ahead  with a truly passive investment rather than having the stress of either managing real estate/tenants or a PM. Having income properties paid off places your cash in a very high risk category, when markets turn or lawsuit leaches attack you will lose your money. Better to leverage the properties and invest the cash elsewhere if you have no use for it. Diversify. 

I am kinda in a similar boat only that I've figured out whats best for me. I have two rental units in my portfolio that I refinanced into a 15 year mortgage at 3.5% in other to pay it off fast but after watching and learning a lot from pod casts here in BP; I would have done things differently. I would have gone with cash flow and a 30 year note..

Even if you want to be financially independent or debt free or whatever makes you happy in 15 years.. you can still go for a 30 year mortgage, just to have the flexibility of having the cash flow if you want it, or you pay more into your principal if you don't need the cash flow.

At this point, I am reluctant to refinance my 15 year notes because I don't want to give up my 3.5% rates. My 2 units cash flow between $300 -$400 each and I have a full time job that sustains me so I will just leave them and focus on new acquisitions on 30 year note.

Using the 30 year loan will always produce a higher return on investment (I have an Excel sheet which spits out the financials IRR of using various types of financing for real estate).

To make myself clear this does not mean 30 year amortization is necessarily the best strategy for you. If your goal is to have the properties free and clear in 15 years (and don't want to have to manually save/invest the difference you would pay doing the longer term lower monthly payments) the 15 year amortization is the best option for you. It is in some ways a forced savings account.