Winona Lake, IN · Member since 2013 · 1 post · 0 votes
Greetings all,
Am new to the real estate investing world and am curious to get everyone's thoughts on whether they finance at 15 years vs. 30 years? Currently looking at both single family and multi-family opportunities.
Here's my 0.02 cents.... When starting out and when you need to borrow, as opposed to paying all cash, then "borrow as much as you can for as long as you can." That means 30 year fixed mortgages. As you progress in the biz, maybe think about a 15 year fixed, and when you best investing years are behind you, then borrow little or no money, pay off some mortgages maybe and strive for properties with no debt.
I've been locking up 30 year. If I want to turn it into a shorter loan, I'll make extra payments to principal. But I think the low interest rates are what's pretty exciting about this market. I don't think in 10 years I'll mind locking at a 4.25% interest rate for 20 more years. Cheap money if you qualify.
Depends on your goals. A 30-year mortgage will provide you with better cash flow because the payment is lower. Choosing to go with a 15-year mortgage will usually get you a slightly better rate... but with rates this low the difference is marginal.
I like to think of it this way... If you have a 30-year mortgage you can choose to pay it as if it had any shorter term. Just calculate how much extra to apply to principal each month, and you can turn it into a 15 or 20 year payoff if you want to. But the rate of return you're earning on that money applied to extra principal is the interest rate of your loan (which is very low if you got the loan recently) so you'd usually be better off deploying that capital somewhere else where your return will be greater. But again, it all depends on your goals and your level of risk aversion.
Cash flow is king. If you want to pay it off early, you can in the months that everything goes smoothly and you have the extra money. The months that a water heater goes out or you have a vacancy, you have the flexibility of a lower payment.
The other factor is your financial discipline. IF you'll take that extra cash flow and save it for the next investment, you certainly should. As another poster noted, you could take the money and pay extra on your principal, but that only provides a modest return of 4-5% (depending on your interest rate). You should be able to get a MUCH higher return on that money by rolling it into your next property!
The rate difference between a 15 and 30 year mortgage currently is at or slightly more than 1% depending on where you get your mortgage and your credit. With 30 year notes hovering around 4.5 to 5%, if you look at it from an apples to apples comparison the difference is between 20 and 25% lower.
@Michael Heisterkamp Personally I have to agree with @Michael Smith . I'd much prefer to take the 30yr and use the extra cash flow as extra payments to principle or as an opportunity to find another good deal, when one presents itself.
@Michael Heisterkamp Personally I have to agree with @Michael Smith . I'd much prefer to take the 30yr and use the extra cash flow as extra payments to principle or as an opportunity to find another good deal, when one presents itself.
The difference in cash flow is often small. Sure it's nice to have more positive cash flow. However the accelerated rate of equity generation is nice as well. Since you can pull equity out of a property tax free that is a great way to generate tax free profits to use towards the purchase of additional properties. To use an often used phrase, different strokes for different folks. The numbers work vastly different in different areas so there is no magic formula for investing.
It took me about year on this board before I realized how important cashflow is. Sure, it's neat to have cash, but for me - cashflow is the driver of growth. If I can get 15% cash-on-cash, I can basically buy 3 rentals with my initial capital over 15 years.
I'm sure there are times that a 15 year mortgage is the correct route, but I would argue that in today's market, 99% of small SFR investors, 30 years is the correct choice.
I agree that the 30 year option is best if you can get it. I am of the opinion that paying off a loan early and having a ton if cash sitting in the walls of a home earning zero interest is not the best use of the cash. Others will argue that not having a payment and having larger cash flow is better, I counter that with the fact that you are open to law suites, lose the tax deduction on interest paid, and give up the advantage of leverage, a key advantage to RE investing.
Will Barnard , are you saying that by owning a property free and clear with monster cashflow, that makes you more of a target for lawsuits?
This might be a dumb question, but how would anyone know?
I'm in the 30 year camp as well. Crunch the numbers and it will tell you what to do. If you must, as Aaron mentioned above, you can make the extra payments if you like though personally I wouldn't. I'd put that money extra money into another deal. Take care.
Here's my 0.02 cents.... When starting out and when you need to borrow, as opposed to paying all cash, then "borrow as much as you can for as long as you can." That means 30 year fixed mortgages. As you progress in the biz, maybe think about a 15 year fixed, and when you best investing years are behind you, then borrow little or no money, pay off some mortgages maybe and strive for properties with no debt.
@ Mark S., I definitely agree with Will that it would make you a better target as you've got more to lose. If they pull up your info and you've got little of interest, that in and of itself may be enough to deter the attorney from coming after you. The attorney may just tell his/her client that it is not worth it.
Will Barnard , are you saying that by owning a property free and clear with monster cashflow, that makes you more of a target for lawsuits?
This might be a dumb question, but how would anyone know?
There is only one dumb question and that is the one that is never asked!
Yes, that is what I am saying, owning property free and clear opens you up to what can be frivolous law suits and anyone can find out by running title. I or anyone can do a title search by area or by specific name (business entity of personal name) to see what properties are owned free and clear.
Here's my 0.02 cents.... When starting out and when you need to borrow, as opposed to paying all cash, then "borrow as much as you can for as long as you can."
I am positive David already knows this, so I am just pointing this out for others, but I would change this line above to state that you should borrow for as long as you can and as much as you can WITHOUT overleveraging which can get you into trouble. Many have simply borrowed too much and when the crap hits the fan, they are on the river without a paddle.
I would also have to agree 30 year is the way to go. You can add a little more to the payment and pay it off early. But if you go right into a 15 year, you're committed to pay the higher payment.
I've seen people get into more debt that they can handle and its a little harder to do that with the banks and the regs today, but certainly not impossible.
It's hard to say, as every situation is unique. You have to look at your goals for the investment, what you short to medium (1 to 5 years) outlook is. Do you plan on owning the property for more than 5 years? If not a 15 year mortgage might be a better bet because you have to factor in selling costs. If the market you are investing in doesn't have the rapid appreciation of an area like SoCal, Phoenix, or Vegas traditionally have then the sales costs will eat up any extra cash flow you have made between the difference in payment amounts. No one answer can cover every situation.
I agree that the 30 year option is best if you can get it. I am of the opinion that paying off a loan early and having a ton if cash sitting in the walls of a home earning zero interest is not the best use of the cash. Others will argue that not having a payment and having larger cash flow is better, I counter that with the fact that you are open to law suites, lose the tax deduction on interest paid, and give up the advantage of leverage, a key advantage to RE investing.
I love it when I see others repeat the advice I've given, even if they use my words and they think of it all on their own!
Also keeps your DTI ratio down for other loans. You can always pay it off to any schedule you like, but you don't have the obligation to do so.
On a 30 you'll pay a 1/4 to 3/8 more in interest, investors usually have someone else paying it anyway, it's expensed so there really isn't that big of a deal, worth the better DTI opportunities.
Cash in the walls costs you later to get it out, the other way is to sell.
If you're too worried about getting sued because your net worth increases, stop working or get more insurance and bear down on your management skills.
Appreciation is earned, sometimes faster than your pay down on a mortgage, either a 15 or a 30 in the early years.
While your financing needs to fit your business model and either may be more appropriate, the 30 usually wins out. Look to your use of funds over time.
Hope Will didn't mind me playing off his post, but I agree word for word in his first sentence. As to law suits, get insurance and sleep well. :)
I'll weigh in with my preference for the 15 year note. I currently work a day job and grow my real estate business on the side. Cashflow from 6 properties covers all my expenses and I can put my income from my job to growing my business and some entertainment. I just finished refinancing the 2nd duplex I purchased in 2007 from a 30 year note to a 15. Now everything is on a 15 year ammortization. I am 28 and want to easily be able to retire and move into real estate full time by age 40.
For my latest refinance I lost about $250/m in cashflow with the higher payment. I am still able to cashflow $100/door and this is my worst performing property. With limited resources I want to get the biggest bang for each buck as I could lose all motivation to buy any more tomorrow or I could find myslef locked out of financing for one reason or another. I believe by operating this way I get better deals as the property must perform well on a 15 year note. I also believe that this path allows me to have more options faster. 10 years down the road when I have the financial capability to buy and rehab more properties at a time I believe it would be more beneficial to go to a 30 year note as at that point I won't have a day job. Income will be more important then. Right now I want to have a growing but more importantly a rock solid base in which I can build on without any worry.
I agree with Kyle. The interest rate on a fifteen year loan is lower than a 30. Yes, the payment is higher, but you wipe out fifteen years of payments on the back end. I took out a slew of fifteen year loans in my late 20's, which will be paid off in my early 40's instead of my late 50's. I know people in their 60's and 70's who are still making payments. No thanks......
It does depend on the individual and their goals and tenure as a real estate investor. I've had a bunch of 30 year mortgages, and I don't recall any of them going the full 30 years. Either the property was sold (and a better property bought) or the mortgage was paid off early with cash from another sale or progressively paying extra from property cash flow. Some were Section 1031 exchanges so taxes were deferred.
The benefit as I see it of the 30 year mortgage, if you are just starting out or need to finance is:
1. Payments are lower, sometimes about 20% lower
2. Lower payments mean greater affordability
3. Able to buy more property
4. Can always pay off early or make extra payments
5. Perhaps the difference between positive cash flow and not positive cashflow
The advantages of the 15 year mortgage are:
1. Debt paid off sooner
2. Interest rate is lower
3. Pay less in interest currently and over the life of the mortgage
If you don't need the lower payment and you don't want a lot of properties, or you're planning an early retirement or any retirement, then go with the 15 year.
Similar to what @Kyle Hipp and @Rob K. said, I aim more for when I want to stop making payments. My goal is by 50 (was 55 so my first few are a bit longer) to have any home I'm still holding to be free and clear. Since I'm working solely with portfolio loans at this point the longest I can get is 20 but that's about perfect as I am in my late 20's.
All else being equal though, longer is almost always better. If you can go 30 year and get 15% cash on cash return for those 30 years and reinvest what you make it will take a big interest rate difference to justify dropping that return by a significant margin.
If you are looking just straight cash, yes the 15 year can potentially make more money over the 30 year time period due to the last half being free and clear. But if you are investing the profits as you go, the power of compound returns give the edge to the 30 year.
I don't think there is ONE answer for this question. The best decision will depend on your investment goals (short, medium, long), your financial position. Of course your goals might change. So, something you might consider important today might not be as important tomorrow. In that case, you want to have the flexibility to make adjustments. Also, the market can change, the economy can change, ... outside factors can influence many things.
I would say, chose the option that give you the most flexibility. I have found that 30 year give one more flexibility to weather tough situations.
Kyle definitely had a point, but it seems like he refinanced to 15 after accumulating 6 properties. I say 30 yr mortgages to obtain the properties, then reduce to 15 after you get the numbers you want and want to hurry up and pay them off.
I thought it was an excellent point about being a target for lawsuits. When people pull your information up and see a mortgager, its not such an attractive pile of rocks, then.