Rental Empire: what you wish you'd known for financing ?

4 Replies

My wife and I just finished our first BRRR deal on a single family residence. We're looking to get smarter as we get more rentals and wanted to ask y'all for help. I wanted to see if any of you all have guiding principles on these areas of thought: mortgage length, paying extra on debt, selecting your first couple owner occupied homes, and other thoughts.

1) 15 year mortgage or 30 year mortgages? To frame this one, the question I'm asking is if you could be close to breaking even with a 15 year mortgage or you could be cash flow positive, which one would you take? If you take the 30 year, you have more of a cash providing asset. But if you want to get your asset paid off and maybe paid off before things like the roof and other stuff wears out, maybe the 15 year would be the better route. 

2) Do you want to put extra towards your mortgage ever to save on interest for these homes or do you put all that money towards getting more homes? 

3) My understanding is a bank will loan you up to a certain number of homes (4 maybe) and then they are gonna not be so inclined to keep loaning to you and maybe make you do investment properties. So my wife and I have wondered, 

a) should we try and buy the most expensive house we can (that's still an asset producer) with the lease money down, so that we can later sale those for the most cash and use that money to buy more rentals.  Basically, you could buy 3 houses that were 200K each, or you could have bought three homes that were 350 K each and later when you sell the 350K ones, they have more profit if appreciation worked out, to be used for investment purchases.  

b) should we try to climb the multifamily ladder instead (duplex, to triplex, to quad,...) ? 

4) what else are we not thinking about that might be worth thinking about (taxes, timelines etc) 

Hi Ben, congrats on completing your first BRRR! For what it's worth, here's my 2 cents on your questions.

1. 15 vs. 30 year? 30 year all day. You can make additional payments to save on the interest over time. If anything ever comes up, you won't be pigeonholed into the higher 15 year payment. Additionally, if you look to finance other properties with a conventional loan (or any loan that looks at your DTI), it's best to have the 30 year payment instead of the higher 15 year payment. It'll increase your purchasing power a bit. Besides, you never know if we may have another eviction moratorium type situation. Wouldn't you rather have a 30 year payment than a 15 year payment? Better yet- take the 30 year amortization and put any monies that you would've used to pay the 15 year payment into some sort of other investment account that will grow over time (best to connect with a good financial planner here). At the end of the 15 years, you will hopefully have enough to pay off the remainder of the mortgage.

2. Depends on your goals. If your goal is to be like Dave Ramsey and pay everything off, then go ahead and put extra towards the mortgage. Remember, you can only access around 70-75% of the value of the property in a refinance so that extra 25-30% of your money is sitting dead unless you decide to sell the home. Personally, I would rather put the money towards expanding and getting additional streams of revenue. 

3. For any bank that won't loan to you if you have more than 4 mortgages, that is an additional requirement that particular bank has and you should go find another lender who deals with investors. The purchase prices/kinds of properties to buy really depends on your goals. Do you want to have a LTR empire? Are you into flipping? STRs? Remember that most SFH investment properties require a minimum of 15% down. Multis are usually 20-25% down.

@Ben Magee 30yr mortgage. Less required to pay every month in bad times but you can always pay more in good times. Depending on which property it is of mine and what the cash flow is left after reserves, CapEx, and vacancy, I try to put between $50-$250 more each month on my mortgage payments, but that's me. Then I save the rest to buy my next property.

You can have up to 10 properties with loans outstanding with Freddie or Fannie. Then you have to go commercial.

Personally I like the stack although I'm not so strict with mine. I bought a duplex then a SFH for a flip. Then a 4-unit. Now a 3-unit that needs some work.

I prefer the bigger ones because it’s more doors together so your expenses are consolidated and if one unit is vacant the others support it. My geographic area kind of limits me to 3-4 units unless I go long distance.

This is all me pontificating on my approach, but its basically all up to the strategy you would like to pursue.

Either way I would still recommend a 30 year, but here is the logic behind that decision. 

30 year loans offer lower payments. If you are focusing on cash flow it leaves more room for expenses and investment in future deals. There is value to leverage; i.e. you can buy more properties and have more flexibility with how you spend your money. This means you could buy more with the money that you would be using to pay down a 15 year loan. However, it does come with a higher interest rate. But if you were to add extra payments on top of your regular mortgage payment, it is directly counted against the principal balance on the loan. 

There is an alternative theory that the more you pay down a loan the more room you have to adapt if you need to pull out equity or change positions. Restated, when everyone else is crumbling you will have options if the market changes. 

In my mind, principal pay down is only 1 of 4 profit sectors. Appreciation, tax benefits and cashflow (the other profit sectors) yield more benefits across multiple properties when compared to a single home on a 15 year term. But its a balancing act, 1 great property is worth more and will cause you less stress than 3 sub par 30 year fixed problem properties.  

@Jeffrey K. , some great points on the 4 profit sectors. thanks for sharing.

@Alecia Loveless I agree, the margin sounds a lot better to me for possible bad times, I do like your $50-$250 idea for extra. good to know about the number being 10. 

@Jeff Shumway good points about potentially doing something more lucrative with the money instead of paying down the mortgage and the limitations there of pulling out your investment only to 75%.