15 yr or a 30 yr mortgage???

87 Replies

Hey guys,

So I’m buying my first single family rental in about 8 months and I’m debating between a 15 or a 30 yr mortgage. I love the idea of not paying as much money to the bank in interest, but I also love the flexibility of a 30 yr mortgage due to a lower payment (especially because I already have another house in mind as soon as I can get a down payment for that). My payment on a 30 year would be 650 and for a 15 year would be 850. My rent would be 1500, so I would get around 1350 back after paying property manager. Thank you guys in advance for your wisdom and advice!!

Originally posted by @William Thomas :

Hey guys,

So I’m buying my first single family rental in about 8 months and I’m debating between a 15 or a 30 yr mortgage. I love the idea of not paying as much money to the bank in interest, but I also love the flexibility of a 30 yr mortgage due to a lower payment (especially because I already have another house in mind as soon as I can get a down payment for that). My payment on a 30 year would be 650 and for a 15 year would be 850. My rent would be 1500, so I would get around 1350 back after paying property manager. Thank you guys in advance for your wisdom and advice!!

 First, as long as you have positive cash flow, and it appears as though you do, you are NOT the one paying the mortgage...the tenant is.  If it takes them 15 years longer to pay it...so what.  It will bring you higher cash flow each month.  It's not about the total interest that is paid on the mortgage.  It's about who is paying it, and how that impacts your cash flow.

This is a good question.  For me, when I was new to investing and most likely to make costly mistakes I did 30 year notes to give me more cash flow.  Now that I am less likely to make costly mistakes and have a larger pool of rentals I do 15 year or less.  This game really doesn't get fun until the properties are paid off.

Originally posted by @William Thomas :

@Joe Villeneuve

Hey joe, sorry what I mean by paying the bank less interest is the idea of getting equity into the property faster.

That's not getting you anywhere faster.  All you're doing is taking cash from your bank, and moving the same money into the brick of the property...which again, the tenant is doing for you already.  It's the same money you had in the bank...that is free to use.  When you put it in the now "bought" equity, to access it again, you have to pay for it.

Don't mistake the value of appreciated equity with that of purchased equity.  You can't buy equity, and think you are ahead.  You're not...unless, the tenant is buying it for you...which they are.

 

Originally posted by @Joe Villeneuve :
Originally posted by @William Thomas:

Hey guys,

So I’m buying my first single family rental in about 8 months and I’m debating between a 15 or a 30 yr mortgage. I love the idea of not paying as much money to the bank in interest, but I also love the flexibility of a 30 yr mortgage due to a lower payment (especially because I already have another house in mind as soon as I can get a down payment for that). My payment on a 30 year would be 650 and for a 15 year would be 850. My rent would be 1500, so I would get around 1350 back after paying property manager. Thank you guys in advance for your wisdom and advice!!

 First, as long as you have positive cash flow, and it appears as though you do, you are NOT the one paying the mortgage...the tenant is.  If it takes them 15 years longer to pay it...so what.  It will bring you higher cash flow each month.  It's not about the total interest that is paid on the mortgage.  It's about who is paying it, and how that impacts your cash flow.

 I disagree here.

I will agree that the tenant is paying it only in the since that you, the owner, don't have to some up with the extra cash to pay it. But when you look at it from the perspective of there an additional 15 years of time that you are not reaching the maximum cash flow for that property, you start feeling like you are loosing out.

I will say though that would really only apply well to property that you know you are going to keep for a LONG LONG time. Well past the last mortgage payment. If you are getting a rental and plan on using it as just a stepping stone into REI than a 30 yr loan would probably be best. Take advantage of as much cash flow as you can while you have it.

Originally posted by @Jacob Sampson :

This is a good question.  For me, when I was new to investing and most likely to make costly mistakes I did 30 year notes to give me more cash flow.  Now that I am less likely to make costly mistakes and have a larger pool of rentals I do 15 year or less.  This game really doesn't get fun until the properties are paid off.

Before you start adding up your money, make sure you add...and subtract, all the numbers here.  you don't get any gains at all from the early payoff until year 16.  Then you only are getting a prorated gain from the interest not paid over the last 15 years.  Keep in mind that the only money you are paying, is what comes out of your pocket...which should only be the down payment.  If the property is cash flowing positive, the tenant is paying both the principle and the interest on the mortgage. 

Every month you make the higher payment on the 15 year mortgage, you are taking the cash flow equal to that extra payment amount, and giving it to the mortgage company.  A small percentage of it goes to the principle, and the vast majority of it goes to the interest...all of which the tenant was already paying for you.  

In order to make a profit, you have to recover all the money you paid first.  Money YOU paid, not your tenant. In this example, that's $200/month/$2400/year...or, $36,000 out of pocket...in addition to the down payment.  With the added cash flow you will get in year 16 with no more mortgage payment, it will take you an additional 5 years to recover the lost $36k in cash flow.

The real question is, this.  If you took that lost $36k, and invested it in the next property (which William has already said he's is looking to do, can your next investments...and the ones that follow (using the same savings multiple times over), make you more money than you think you are saving going with the 15 year?

If it can't, then you're investing in the wrong places.

 

Originally posted by @Nik Moushon :
Originally posted by @Joe Villeneuve:
Originally posted by @William Thomas:

Hey guys,

So I’m buying my first single family rental in about 8 months and I’m debating between a 15 or a 30 yr mortgage. I love the idea of not paying as much money to the bank in interest, but I also love the flexibility of a 30 yr mortgage due to a lower payment (especially because I already have another house in mind as soon as I can get a down payment for that). My payment on a 30 year would be 650 and for a 15 year would be 850. My rent would be 1500, so I would get around 1350 back after paying property manager. Thank you guys in advance for your wisdom and advice!!

 First, as long as you have positive cash flow, and it appears as though you do, you are NOT the one paying the mortgage...the tenant is.  If it takes them 15 years longer to pay it...so what.  It will bring you higher cash flow each month.  It's not about the total interest that is paid on the mortgage.  It's about who is paying it, and how that impacts your cash flow.

 I disagree here.

I will agree that the tenant is paying it only in the since that you, the owner, don't have to some up with the extra cash to pay it. But when you look at it from the perspective of there an additional 15 years of time that you are not reaching the maximum cash flow for that property, you start feeling like you are loosing out.

I will say though that would really only apply well to property that you know you are going to keep for a LONG LONG time. Well past the last mortgage payment. If you are getting a rental and plan on using it as just a stepping stone into REI than a 30 yr loan would probably be best. Take advantage of as much cash flow as you can while you have it.

 Add up the numbers...all of them.

@Joe Villeneuve , I do understand what you are saying.  The thing we always forget and is difficult to factor in is that debt = risk.  It is difficult to truly factor in risk.  So for me, I want to find some happy medium of being able to grow while also attempting to limit my risk.  The 15 year note is where I happened to land.  Additionally, I really want to have my properties paid off in the next 8-10 years to give me some more options in life.  With all that said, mathematically I agree with you.

@Jacob Sampson just put of curiosity, what is the risk of having debt?

The risk, in my view, is vacancy, and having to pay my own mortgage, or a downturn in the economy, and I have to charge less to get tenants. All of these risks are lower with a 30 year, because you have a lower payment. You're really taking on more risk for 15 years, to have less risk then, but really, in 15 years, there is little chance that my property, financed for 30 years, will ever be worth less that what I owe at that point.

Originally posted by @Joe Villeneuve :
Originally posted by @Nik Moushon:
Originally posted by @Joe Villeneuve:
Originally posted by @William Thomas:

Hey guys,

So I’m buying my first single family rental in about 8 months and I’m debating between a 15 or a 30 yr mortgage. I love the idea of not paying as much money to the bank in interest, but I also love the flexibility of a 30 yr mortgage due to a lower payment (especially because I already have another house in mind as soon as I can get a down payment for that). My payment on a 30 year would be 650 and for a 15 year would be 850. My rent would be 1500, so I would get around 1350 back after paying property manager. Thank you guys in advance for your wisdom and advice!!

 First, as long as you have positive cash flow, and it appears as though you do, you are NOT the one paying the mortgage...the tenant is.  If it takes them 15 years longer to pay it...so what.  It will bring you higher cash flow each month.  It's not about the total interest that is paid on the mortgage.  It's about who is paying it, and how that impacts your cash flow.

 I disagree here.

I will agree that the tenant is paying it only in the since that you, the owner, don't have to some up with the extra cash to pay it. But when you look at it from the perspective of there an additional 15 years of time that you are not reaching the maximum cash flow for that property, you start feeling like you are loosing out.

I will say though that would really only apply well to property that you know you are going to keep for a LONG LONG time. Well past the last mortgage payment. If you are getting a rental and plan on using it as just a stepping stone into REI than a 30 yr loan would probably be best. Take advantage of as much cash flow as you can while you have it.

 Add up the numbers...all of them.

 I agree with you there (and your above post). The numbers don't lie. But you havent taken into account what people want and their goals. If their goal is to acquire as many properties as possible and never stop growing then ya the 30 yr loan is the way to go. No need to keep your money tied up in bricks & windows that you cant use. 

But if someone only wants enough properties to create enough cash flow to retire sooner without having to manage a huge portfolio then the 15 yr loan is the way to go.  How many paid off properties would it take to get you $5k a month vs how many properties still with half their loan time on them? 

@William Thomas There's no one correct answer as it will depend on your specific situation and your ultimate goals. However, if you're just beginning and buying your first rental property, and already considering buying your next one, then I'd suggest going with a 30-year mortgage. Reason being, the higher payments of a 15-year mortgage will have a bigger impact on your DTI ratio and could impact your ability to even qualify for future mortgages.

You could always take out a 30-year mortgage and pay it off like a 15-year mortgage, but you can’t take out a 15-year mortgage and make the lower payments that a 30-year mortgage allows you to make. 

Just something to think about. 

@William Thomas ,

I'd say "it depends".

You'll build equity faster with the 15 year. The question would be, then, is that of value to you versus the additional $200/month cash flow with the 30 year?

You could voluntarily accelerate the 30 year by paying that additional $200/month as additional principal, or not month-to-month depending on your cash flow needs.

It's all in the numbers ...

@Joe Villeneuve

If you check out an amortization table the vast majority of money goes to interest in a 30 year over 90% but only 60% or 70% of a 15 year does. And gets to 50% quickly. Also when selling a property after 5 years you notice a huge difference in equity built. Check the tables if you don’t believe me.

I get what you are saying and pure numbers you are right if you invested that extra $200 or whatever in another property. But the idea that in my 40’s I’ll be debt free with big big bucks rolling in is better than that extra fancy dinner per month per property.

Person decision.

@William Thomas go with a 30 year. Everyone’s situation is different but here’s how I see it.

1) leverage your way into a property for minimum spend. 30 year = lower payment.

2) you can always make an over payment each month and pay off the property as fast as you want, with no prepayment penalty.

3) Lower monthly obligation. If something happens in the next 1 month - 15 years, your monthly obligation is minimized. You are not tied into that higher payment. You can always make a 15 year payment amount each month.

4) you most likely won’t keep the property to satisfy the entity loan. You may cash out the equity for repairs, improvements, or next investment venture. My dad would say “They are not building any more land” 😉 property value is most likely going to increase and you can utilize that equity if needed.

5) interest difference is usually minimal between the different terms.

Just my 2 cents. But A large majority of the time I suggest a 30 year. Because people are not going to keep the property to even satisfy a 15 year. Sell it, take the equity and use it for the next venture.

@William Thomas you would get a better return by taking the additional payment you would be putting into the 15yr and instead buy another property or save up for one. Since inflation is 2% on avg per year, a 30yr fixed mortgage ends up being a steal 5-10 years from now. You could always make additional payments on the 30yr too fwiw.

@William Thomas I would recommend getting a 30 year loan, and paying the 15 year payment if you want to.  The difference in the interest rate is usually minimal, so you can capture the advantages of the 15 year loan, without losing the flexibility if times get rough. Run the numbers on how long it will take you pay down the 30 year loan if you pay an extra 300/month. I'd expect it's very close to 15 years.  And in my opinion that small amount of extra time is definitely worth the flexibility of being able to put that 300 to a different use in the future, should the need arise

Originally posted by @Jacob Sampson :

@Joe Villeneuve, I do understand what you are saying.  The thing we always forget and is difficult to factor in is that debt = risk.  It is difficult to truly factor in risk.  So for me, I want to find some happy medium of being able to grow while also attempting to limit my risk.  The 15 year note is where I happened to land.  Additionally, I really want to have my properties paid off in the next 8-10 years to give me some more options in life.  With all that said, mathematically I agree with you.

 Debt is risk on your own house.  Debt is leverage, and the cash you put in is risk on a rental.  Just ask the bank.  There are three parts to risk:
1 - What is at Risk = the Cash, or in the case of a loan, the "CASH" that is the loan.
2 - Who is at Risk = the lender.  They are the one risking the "Cash".
3 - Who is The Risk = The borrower.  They are the ones that may not pay the loan back.

You say you get more options with the property paid off.  Don't you think you have more options with more cash in your control, meaning more cash flow?  The longer this occurs, and accumulates, the earlier you can take control...and this is exponentially in your favor.

Originally posted by @Nik Moushon :
Originally posted by @Joe Villeneuve:
Originally posted by @Nik Moushon:
Originally posted by @Joe Villeneuve:
Originally posted by @William Thomas:

Hey guys,

So I’m buying my first single family rental in about 8 months and I’m debating between a 15 or a 30 yr mortgage. I love the idea of not paying as much money to the bank in interest, but I also love the flexibility of a 30 yr mortgage due to a lower payment (especially because I already have another house in mind as soon as I can get a down payment for that). My payment on a 30 year would be 650 and for a 15 year would be 850. My rent would be 1500, so I would get around 1350 back after paying property manager. Thank you guys in advance for your wisdom and advice!!

 First, as long as you have positive cash flow, and it appears as though you do, you are NOT the one paying the mortgage...the tenant is.  If it takes them 15 years longer to pay it...so what.  It will bring you higher cash flow each month.  It's not about the total interest that is paid on the mortgage.  It's about who is paying it, and how that impacts your cash flow.

 I disagree here.

I will agree that the tenant is paying it only in the since that you, the owner, don't have to some up with the extra cash to pay it. But when you look at it from the perspective of there an additional 15 years of time that you are not reaching the maximum cash flow for that property, you start feeling like you are loosing out.

I will say though that would really only apply well to property that you know you are going to keep for a LONG LONG time. Well past the last mortgage payment. If you are getting a rental and plan on using it as just a stepping stone into REI than a 30 yr loan would probably be best. Take advantage of as much cash flow as you can while you have it.

 Add up the numbers...all of them.

 I agree with you there (and your above post). The numbers don't lie. But you havent taken into account what people want and their goals. If their goal is to acquire as many properties as possible and never stop growing then ya the 30 yr loan is the way to go. No need to keep your money tied up in bricks & windows that you cant use. 

But if someone only wants enough properties to create enough cash flow to retire sooner without having to manage a huge portfolio then the 15 yr loan is the way to go.  How many paid off properties would it take to get you $5k a month vs how many properties still with half their loan time on them? 

 Actually, the opposite is true...and I can prove it to you.  PM me.

Originally posted by @Josh C. :

@Joe Villeneuve

If you check out an amortization table the vast majority of money goes to interest in a 30 year over 90% but only 60% or 70% of a 15 year does. And gets to 50% quickly. Also when selling a property after 5 years you notice a huge difference in equity built. Check the tables if you don’t believe me.

I get what you are saying and pure numbers you are right if you invested that extra $200 or whatever in another property. But the idea that in my 40’s I’ll be debt free with big big bucks rolling in is better than that extra fancy dinner per month per property.

Person decision.

 I am very familiar with those tables.  It's those tables that led me to the system I use (and mentioned in part here), and the short and long term exponential impact (in both directions) that table shows.

@William Thomas this debate is brought up so often and with it comes the same people saying the same boring stuff. Round and round we go as everyone debates their opinion.

There are pros and cons to both. 30 year gets you more cash flow but you pay a lot in interest. 15 year gets you less cash flow but you pay a lot less in interest.

When I started I did 30 year loans. Now I prefer to do 15-20, as the pay down is faster. There’s no reason you can’t have paid off properties and properties with debt. I do both, lots of people do both.

@Joe Villeneuve If I have a rental home that is fully leveraged and the market goes south I am far more likely to lose that asset than if the property is totally paid off.  That is the risk of debt.  Certainly, If I could ensure that I would always be able to maintain the revenue I needed to service the debt and maintain the asset then there is no need to pay down debt because there is no risk.  But that isn't the world we live in.

Additionally, IMO, debt is risk whether it is on a personal home or an investment property.  And debt is always leverage whether it is on a personal home or an investment property.  In both cases I am using debt to leverage a small amount of my own money to control an asset worth more than my small amount.  These principals are the same whether it is a personal property or and investment property.

I would be willing to bet that if we could gather all the investors that have gone bankrupt the VAST majority were heavily leveraged.  Further, I bet there are very few investors that have gone bankrupt whose investments were debt free.  If for no other reason than without debt you have a greater number of options when dealing with a downturn.  

Originally posted by @Jacob Sampson :

@Joe Villeneuve If I have a rental home that is fully leveraged and the market goes south I am far more likely to lose that asset than if the property is totally paid off.  That is the risk of debt.  Certainly, If I could ensure that I would always be able to maintain the revenue I needed to service the debt and maintain the asset then there is no need to pay down debt because there is no risk.  But that isn't the world we live in.

Additionally, IMO, debt is risk whether it is on a personal home or an investment property.  And debt is always leverage whether it is on a personal home or an investment property.  In both cases I am using debt to leverage a small amount of my own money to control an asset worth more than my small amount.  These principals are the same whether it is a personal property or and investment property.

I would be willing to bet that if we could gather all the investors that have gone bankrupt the VAST majority were heavily leveraged.  Further, I bet there are very few investors that have gone bankrupt whose investments were debt free.  If for no other reason than without debt you have a greater number of options when dealing with a downturn.  

 OK?.

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