Refinancing and 15yr vs 30yr

4 Replies

Hey folks,

I got a deal thats looks pretty good in terms of numbers. Let me know if you think other wise.

On a 30 yr loan

downpayment: $19,400

total cash outlay: ~$25,800

monthly cash flow: $297.18

yearly cash flow:$3,566.16

COC return annually: 14.04%

On a 15 yr loan

downpayment: $19,400

total cash outlay: ~$25,800

monthly cash flow: $106.18

yearly cash flow:$1,274.16

COC return annually: 5.02%

The down payment is high (almost all my money) and I won't have much left after buying this property. 

Refinancing

People talk about refinancing to get their investment cash back, but this property is already move in ready with new appliances so I think it was priced accordingly (although I did buy it less than listing price). How would refinancing work in these cases? 

loan year

My dad is pushing me to get a 15yr loan instead of 30yr (b/c of the amount of interest you would be paying with a 30yr) also the equity you get with a 15yr loan is significantly higher and it starts pretty much from the first payment. If this is the case wouldn't it be better to go with the 15yr for a bit and than refinance it when i have more equity in the house? I feel I would be able to pull out more money sooner than if I go with a 30yr. What do you think?

Thank you for the help!

Does you numbers count for vacancy and repairs? If they dont then 30 yr is your only option.   You can always pay more on the mortgage. If you are left with 300 above mortgage then I would put 200 towards vacancy and repairs.

Hi @John Moon ,

Good for you for finding a place that can cash flow on a 15 year note. 

Your father's guidance is excellent for owner occupants, specifically scenarios where the family has decided that monthly household net worth gains are the priority, and/or the family is 100% certain they will would pay a bunch extra each month even if they did a 30 year. 

Most folks buying rental properties, however, feel that monthly cashflow is the priority, and elect to get 30 year notes. Even if you elect to pay extra most months, it'll be nice being able to drop to the minimum 30 year payment during months of vacancy, months where you are spending money on repairs of the property, etc.

Whichever way you elect to go, note that it'll be easier to qualify for future mortgages if you take the 30 year note. We don't calculate rental income by including interest paid on schedule E of your tax returns in our math (that would give advantage to the 15 year note), we look at the minimum P&I payment (this gives advantage to the 30 year note). I don't have the information in front of me necessary to tell you if this is a concern or not in your scenario. 

@Jim Adrian this includes vacancy and repairs. Although I put down only 1250 for cap expenditures per year, b/c mostly everything is new/er. There is still a big difference paying down 15 vs 30 at the same amount (e.g $600 /mo). The 15yr will win out due to interest rates. 

@Chris Mason these are great insights. Yes, he is making these recommendation after owning 2 homes himself. His main concern was paying down debt and owning the place as soon as possible. He wasn't an investor. When you get a chance, could you explain to me the reasoning behind why it's easier to qualify for future mortgages? I don't get it.. :)

Thank again guys for the great perspective! I'm definitely going to use this information I gained to continue develop my real estate intelligence. 

@John Moon Do you ever want to add more doors? If so, go with the 30 year. You can use that to show more income. Barely breaking even on a 15 year hurts you when you try to finance later. Do you have to spend 30 years paying it off? No. If rents dip for any reason does it matter on a lower payment 30 year? No. With interest rates where they are, does the discount for a 15 year help? Not much. Does it matter? No. Your tenant is paying the interest anyway.

There are many reasons to use a 30 year, and only 1 for a 15-year (slight interest reduction). I have never found a scenario where a 15 year works. 15 year is just too risky for my taste.

Either way, great job getting a deal that can cash flow on a 15. That's pretty great!

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