Rental Property Investor · Panama City, FL · Member since 2019 · 6 posts · 12 votes
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!!
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’m not sure that this is how it works everywhere but if you do the thirty year mortgage with the lower payment and higher cash flow you can take $200 of the cash flow and pay it strait towards the principle on top of your normal payment plan($650) if all goes well and you could do it consistently you can more than likely match the pay off time of a 15 year mortgage and pay less interest in doing so.
You do realize that the reduced interest you get for that extra $200/month that comes out of your pocket, is less than $200 for that month right? That means you are spending more money than you are theoretically saving. Also, since the tenant was the one that was paying it anyway, you are falling backwards even more than $200/month.
Spokane, WA · Member since 2019 · 25 posts · 42 votes
7y
@Joe Villeneuve
Well no I don’t understand that as I am just here to learn before I get into it when I am well read/educated on the industry. As you can see I started out my statement with “I’m not sure” as in I really don’t understand yet I’m just giving my thoughts on the subject. But how does the fact that the tenant is paying it anyway mean that you would be losing more than $200 a month?
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y
The cost of an investment is what you pay for it out of pocket...not what the total cost is of the investment. For example, bought a property for $100k, and put down 20% as a down payment, the cost to you would only be $20k...the rest (the mortgage) is paid from the rent...which means the tenant is paying for it. If you add out of pocket (added $200/month), you are reducing the interest charged on the loan, but you aren't saving any money. What you are reducing is the amount of rent that was your cash flow.
The bottom line is this. You don't start making a profit, until you recover all the money YOU spend on the property. By adding to the payments, you are actually falling behind even more, and just adding to the amount of money you need to recover before you make a profit.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Jacob Sampson I see what you're saying, and I agree that $0 debt would be less risky than 100% leverage on everything you own. But Businesses go bankrupt because they cant cover their debt obligations, so when talking about 15 vs 30 year mortgages, you're more likely to do that if you have 15 year notes, because it's all about payments.
Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes
7y
I am in the 30 year camp I tend to pay off early turn it into a 15yr ,17 yr etc...I do not leverage a lot tend to pay cash if possible last house was a 30 yr loan .
Rental Property Investor · Member since 2019 · 407 posts · 267 votes
7y
For single family homes, my preference has always been to stretch it as long as possible. Mortgage paydown is not the goal. Saving interest costs is not on the radar. I continue to refinance when the market allows to access equity to acquire another property. Over 1 or 2 market cycles, the capital growth trumps any sort of paydown...plus the lower payments help out with cashflow and how you look on paper in the meantime.
Rental Property Investor · Fallbrook, CA (San Diego area) · Member since 2019 · 98 posts · 29 votes
7y
I read this nugget of wisdom from Warren Buffet in a CNBC article yesterday:
A 30-year mortgage is "the best instrument in the world," Buffett says. "Because if you're wrong and rates go to 2 percent, which I don't think they will, you pay it off. It's a one-way renegotiation. It is an incredibly attractive instrument for the homeowner and you've got a one-way bet."
Full article : https://www.google.com/amp/s/www.cnbc.com/amp/2017/03/06/heres-why-warren-buffett-thinks-you-should-buy-a-home.html
Lititz, PA · Member since 2013 · 595 posts · 272 votes
7y
Isn't equity in the property the same as cash when a bank is evaluating a financial statement? Therefore if you have a 15 year you will have more equity in the property than you would with a 30 year and less cash, but it doesn't matter to the bank.
Real Estate Agent · Dayton, OH · Member since 2019 · 2 posts · 0 votes
7y
@William Thomas
Hi William, if I were you I would go with the 30 year mortgage, simply because of the flexibility and the extra 200 dollar cushion. If needed u could always pay the 30 year down quicker, it’s best to keep your options open.
@William Thomas I would do the 30 year. If you want to pay it in 15 years and you have the extra income then you have to OPTION to do that by deducting the principal of the loan by paying extra per month. If you take a 15 year mortgage then you are OBLIGATED to pay it no matter what your income is.
Property Manager · Michigan Ctr, MI · Member since 2016 · 661 posts · 581 votes
7y
@William Thomas go 30 every time, why 15 when you can make up for it in time and interest by just paying your 30 year mortgage on a 14 year schedule? Why lock yourself to a 15 and remove your options.
Rental Property Investor · Philadelphia, PA · Member since 2017 · 7 posts · 9 votes
7y
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!!
Hey William,
I'm assuming you are going to get a "regular" mortgage/also assuming you qualify for both loan products i.e. 15 and 30 year. If you go down the 15-year route you are removing any optionality you would otherwise have with a 30-year. Conventional loans allow prepayment, therefore you will have the option to pay more each month towards your principal. If you have the discipline and want the flexibility (things happen in life) you could take a 30-year loan and pay about $850 a month and replicate the 15 year loan. I say about $850 because your rate will likely be a couple basis points (BPS) higher, therefore you will likely pay a bit more to amortize the loan within the same 15 years.
Looking at the WSJ as a point of reference, they state rates being 3.9% for a 30-Year and 3.33% for a 15-year. At that point you have to consider whether the difference of .57% is a justified expense to insure you have wiggle room in the event something happens that impacts your cash flow. This cost is equivalent to to .57 cents on $100 borrowed.
Hope this helps. Feel free to PM me if you have questions.
Rental Property Investor · Chicago, IL · Member since 2017 · 293 posts · 383 votes
7y
@William Thomas Depends on what is your long term goals are. If you would like to have debt free properties as soon as possible, then 15 year mortgage. If you want cash flow now and maybe build a big portfolio, then 30 year mortgage.
@Jacob Sampson I see what you're saying, and I agree that $0 debt would be less risky than 100% leverage on everything you own. But Businesses go bankrupt because they cant cover their debt obligations, so when talking about 15 vs 30 year mortgages, you're more likely to do that if you have 15 year notes, because it's all about payments.
Yeah. I agree with you. In choosing 15 year vs 30 year notes I have chosen to take greater risk for a shorter period of time.
Are you suggesting there is no connection between companies that go bankrupt and their debt loads? That it is random chance that debt free companies go bankrupt at drastically smaller numbers vs companies with debt loads?