15 yr or a 30 yr mortgage???
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!!
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.
@Jacob Sampson
You are so right, yet so many do not understand the liberation of a debt free portfolio.
We stand alone, sir.
@William Thomas you could always do a 30 year mortgage and pay the extra amount that you would pay if you was to do a 15 year each month. This gives you the flexibility of not having to pay that extra amount each month but if you want to you can. Also when you pay over the amount of your Mortage make sure you let them know you want that to be applied directly to the principle.
@Jacob Sampson
You are so right, yet so many do not understand the liberation of a debt free portfolio.
We stand alone, sir.
I’m really trying to see this from your point of view but I’m having trouble comparing companies with a certain level of debt to a single person carrying a mortgage. I don’t know the stats but I wouldn’t disagree that companies with a higher debt might be more likely to go bankrupt but that is a little bit vague, you mean a higher debt to income ratio right? I would think that if a company was going bankrupt and they were offered the option to extend the term of their loan for a lower payment it would, if anything, help them survive a little bit longer. If a company is going bankrupt, it would probably be more about them not being able to generate the cash flow due to whatever shortcomings they're having. If a person can’t make their loan payment, it’s not really because of the level of debt, it’s because their debt to income ratio changed. As long as we’re talking about a fixed mortgage, it’s not the debt that changed but the income. Whether it be a company or person, it’s not the total debt but debt in the form of payments. When the time comes that you can no longer make the payment you’re screwed. If the company’s assets can’t be sold to cover the debt then they go bankrupt. If a person cannot make their payments then they’ll have to sell the house. *The only time a 15 year would be more beneficial than a 30 is that you would have more equity. But two things have to happen for you to reap that benefit: #1 housing market tanks and (at the same time) #2 you are losing income and have to sell the house (for a loss). You’d hope to have enough equity to be able to pay back the loan. If the market tanks, your debt didn’t change and if your income didn’t change either then what the market does is irrelevant. If the market stays the same and your income drops, if you can’t get a lower payment you can always sell.
I was always a 15 year guy. I refinanced to a 15 year years ago and I also add extra to my payment every month. I realized that I did this because I truly hate owing money and I cannot wait for the day to come that I’m paid free and clear and I’ve got all that extra rental income. This discussion here, and in writing this, is changing the way I think about things (it’s got my head spinning). Is there any opportunity that I’m missing out on because I’m using my available cash to pay off my loan?
By using more of my own cash to rid myself of a loan, I’m not seeing the opportunity cost. Borrowing money gives me the opportunity to make more money because I don’t have enough money in the bank to make the deals I’d like to make on my own. My risk in borrowing comes not from my level of debt but from some failure on the income side of things that would affect my ability to pay it back. I guess what I’m saying is being responsible and certain that you can pay your debts is the key to leverage.
@William Thomas in this day and age I would probably have to go over to 30 year only for the fact it looks like things may become slightly unstable. But who knows what the market has in store
@Kyle J. is on the right path with his comments of taking a 30 year and making extra payments to make it a 15 year, IF YOU CAN. The option of having lower payments of a 30 year but being able to shorten it with the 15 year is tremendous when you are starting out. You will make mistakes. You will have something happen that will be earth shattering probably. Divorce, medical, etc. Having flexibility in your early years of investing is a high priority, IMO.
Secondly, I did not see anybody saying this and it needs to be factored. If you do take a 30 year and pay additional CF towards the principal, that is possibly profit that you will be taxed on and if you throw it towards the principal you then negative cash flow when you factor in the taxes. You will pay taxes on that extra CF even though you put it towards the paydown. A lot depends on your tax brackets and deductions/depreciation.
I do a lot of these in my Roth 401k so I don't have to worry about the taxes though. It is all tax free. However, all my properties are some sort of creative deals, sub 2's, LO, OF.
Your best friend is a good Amortization program where you can play "what if" games to look at extra payments and such. My Excel spreadsheet Am Chart makes me more money than anything other than my lips working. If you aren't talking to (motivated) sellers you aren't buying properties.
Also realize this. Newer people haven't seen anything higher than a 4-5% interest rate loans. They will go up. They will at some point be back over 10%. Any loans you can get these days, 2-5% is a blessing you may not see again in your lifetime. If you get a 3% loan now for 30 years where else can you borrow money for long term at that rate. But I bet everything you invest in gets you a much much higher return than 3%. Borrow long at low rates, invest at high rates. That is how you make money! Anything else is gambling. For you younger people, that is the opposite of what savings and Loans did in the 70's and 80's. They borrowed short term at low rates (paying CD rates for 1-3 years) but then made loans for 30 years also at slightly higher rates to arbitrage the money. Unfortunately for them the rates rose on interest rates to as high as 18%. They were then borrowing on CD's at high rates like 15% but still had money invested at 5% (30 year mtg's), thus losing 10% interest daily on every loan they had made earlier. Therefore, no more Savings and loans.
I pool money from CF and then analyze which higher interest property the extra CF should go to to pay down the principal enough to get it to the point where the loan flips to more principal and less interest. At that point, rerun your EFFECTIVE interest rate on the balance of your loans. When you do this you can often turn a 6 or 7% int rate loan into a 2 or 3% loan out of your pocket on the remaining balance. But again, I am using this where I have taken a loan over Sub2 and the loan was already 8 to 15 years into the mortgage. When looking at the AM charts the amount of interest is front loaded and usually 70% of the interest has been paid already (by the previous owner- gotta love them!) for the whole 30 year term.
Bonus info:
For you out there that are nearing 59 and half and already have your Roths done for the 5 year min term, this is what I am getting ready to do since I am shortly hitting that age.
Instead of taking my income from my company and paying all the taxes on that income- SS, FICA, Medicare,etc, I can now run ALL the income thru my Roth accounts and take a defacto salary from it in distribution form and pay NO taxes then. My income can stay the same as it was and I still grow the Roth by 30% each year from the no tax portion.
My point here being is if you haven't started your Roth IRA or Roth 401k, then get to it. By itself, these are the most crucial tools (together with your brain and work ethic) you can have to building your retirement and lifestyle in the future. But it starts now, not in 10 or 20 years.
Just an opinion of an oldtimer who made tons of mistakes in my early years and would love it if others didn't make some of the same mistakes. Always be making course corrections.
@William Thomas 15 year notes are great in theory, as long as you still cash flow. However the problem lies in scaling up your business. When you acquire a 15 year mortgage you are increasing your debt to income ratio, compared to a 30 year. (Not always true, but to some banks it is).
Also, you have less wiggle room and protection during vacancies and down times. You will need a lot more reserve cash for those times.
I say if you want it paid down faster, put it on a 30 year, but pay it like a 15. The discipline on this is tough, but if you want that you can make it happen.
Good luck @William Thomas !
@Joe Villeneuve Love this answer.
@Jacob Sampson
I'm simply saying I want to walk some fine line wherein I pay my properties off as soon as I can while still being able to grow. I agree that during the 10-15 year period of the note I am accepting more risk but for a shorter period of time. After the note is paid off I am in a significantly safer position.
I'm not ignorant to the arguments being made for 30 year notes. I understand the math and why people would make that choice. I'm simply saying debt = risk and I want to attempt to limit that risk by paying my properties off as soon as possible. I doubt I will ever be completely debt free because I recognize the benefits of leverage, and it is difficult to grow large when entirely debt free.
@William Thomas focus on cash flow. Take the 30 yr with the lower payment.
@William Thomas definitely 30 year fixed loan and you can choose to pay it off in 15 years
@William Thomas I personally have had both 15 year and 30 year mortgages. First of all I always go for fixed rates, even if only for the first 5 years. I hate adjustable mortgages, and like the steady payment of a fixed mortgage. When I first started and didn't have any money I always went by my rule of "Borrow as much as you can for as Long as you can." So on the first property and many of the later properties I was always going for 30 years, so that I could buy more properties. My plan hit a bump in the road when a bank turned me down because of the age of the property, about 100 years old, so I had to take the 15 year mortgage that they offered. It was no big deal and the next property i went back to 30 year mortgages. It worked out ok, as I've bought and sold over 965 properties for my personal inventory. I talk about that first purchase on Bigger Pocket Podcast #82
As many of those before me said, "It Depends".
In my personal situation (Your's may differ).. I would go with the 30 year loan. Reason being, 1) lock into a historically low interest rate. 2) Increase you current cash flow to build up cash reserves and the down payment of the additional property you mentioned. 3) You can always pay off the 30 year lone at the 15 year rate if you want to start chipping away at that equity (it'll jut be at a slightly higher interest rate.
Best of Luck,