15 year or 30 year mortgage?

18 Replies

We're looking to purchase our first rental (investor couple mid 40's, early 50's respectively). 

We plan on borrowing about 60,000-70,000. 

Is it better to do a 30 year mortgage with approx. 200+ cash-flow margin or a 15 year mortgage with 100 a month cashflow margin?

We are looking to keep this property (and hopefully a few more in the future) as part of our retirement income.

Thank you so much for any views.

@Cristina S. lots of different opinions on this subject so I will try to tackle a few that go in line with the practical differences between the two.  The 15 year loan will have less interest paid towards it over the life of the loan but the 30 year loan has some pretty distinct advantages.  Not only does the 30 year loan allow you to cash flow more but it will also allow you to qualify easier for the next loan.  When you qualify for your next loan they hold your present debts against you.  Every little bit helps.  The 30 year loan also offers flexibility.  Chances are that the 30 year loan will not have a prepayment penalty.  So if you wanted to pay a 15 year payment you could.  AND if things got really hairy in the world...you could go back to the 30 year note payment.  If you were on the 15 year payment...you will always have to pay that payment no matter what.  So qualifying easier and flexibility are in favor of the 30 year loan.

Everybody's financial situation is different but if you are just starting out I think I would lean on the 30 year loan for those reasons.

There are advantages and disadvantages to both. I personally believe in a 15 yr mortgage for one’s primary home and 30 yr mortgages for rental properties. Your profits seem low though so perhaps the property in question is not good as an investment property.

If you are operating as a business 30 year is the only option.

If you are operating as a hobby and only looking to park your cash then pay off the mortgages. Your only risk in parking the cash as dead equity is a down turn in the market. You may not get it back.

15 year fix would be good option.  Your calculation is not right for 15 year fix and 30 year fix comparison. 

For a $100 diff, I'd do a 15.  When the 15 is paid off, a 30 will still have 75% of the balance left.

Some like their mortgage - derived from the word muerte, which means 'til death',  to last a long, long time.   In 15 years, do you want to be done with this stupid payment or still have 75% left to go and make it closer to an actual til death payment?

30 year. you can always pay down the loan faster if you like.

I’m with @Steve Vaughan on this one. Get the 15. You will have a free and clear property in 15 years and it will cashflow better. In real cash. 

Unless your goal is to grow to 25 units really fast. Then you might want to go with 30's just to keep DTI low. But for what it sounds like you want to do 15 is the right path.

I agree with Andrew. I would go with the 30 year loan option. Since you will qualify for the next loan easier because of the cash flow you are getting from the first one, you can build. Then, once you have a number of properties, all with positive cash flow, you can start paying them down quickly. That is at least what my plan is.

Thank you all so much for your opinions - I greatly appreciate them!

For all the people that say 15, why not just pay down the 30 faster? But IF something happened you'd have a lower payment vs the 15. 

Based on answers and our own analysis , we're leaning 30 - with annual extra payments to reduce time to "paid off" as much as possible. 

With cash coming from our day jobs, we'd hope to pay even sooner than 15 if all goes well; but then again, by that time, we might want to add more properties.

Heck, we can't even seem to be able to find the first one, for now. 

$200 cash flow is kinda low. If you have one major issue of repair over $1000 it would wipe out most of the profit

Roof, aircon HVAC , stucco, hot water heater, it’s not cheap to fix and replace.

Don’t forget if the house is empty 5% of the year. People move in or out.
No income. There goes your profits in the toilet

Cheers ! 🍺🍻🥂

Elian,

I keep telling this to  my husband but he says it's unrealistic to hope you get more than 200 (on a 30 year mortgage).

We are not sure how an awesome deal could be found where you can draw much higher cash-flow from a 50,000-60,000 investment. 

Unfortunately, we don't have the time to drive for dollars, do cold-calls, go to auctions, contact wholesalers (I am not even sure  how this works).

Should we just give this up altogether and just invest in some REIT-s? But those would be bring even less than the 100-200 cash-flow+ mortgage paid off.

It can be difficult to find a lender who will do sub 50k loans, you might need to increase your budget or reduce number of properties.

As others have said, there are advantages and disadvantages. In your situation I would do a 30 year mortgage, but make the extra payment monthly and aim to have it knocked out in 15 years. If you end up in a situation where you have large expense that you are unprepared for, being able to make the minimum payment will be beneficial to you. Just really attempt to be disciplined to pay it off within 15 years to the best of your ability.

The one other thing I would take into consideration is what is your goal? Do you want to have this one rental and get as much equity as possible as you head into retirement? Are you attempting to get cash flow now for extra money? Are you looking to use cash flow to buy more properties? Look at what your goals are and you will see which route is most beneficial for you!

-Ben

Originally posted by @Matt K. :

For all the people that say 15, why not just pay down the 30 faster? But IF something happened you'd have a lower payment vs the 15. 

 I say 15 on this particular example because the rate on a 15 can be up to 30% lower than a 30.  Rate difference hasn't even been discussed yet. 

The payment difference in this example is only $100.

She mentioned just wanting RE to help a little with retirement. She ain't going all Grant Cordone with this RE thing.  What would you rather have in retirement- payment or no payment?

For the lousy $100 difference, all of you except @Joshua D. are stretching her 'til death out 30 years. We are also the only ones I see that actually own free and clear property.  Funny that.  

30 years is longer than most of you have been alive.  Say it with me-  "Thirty years.  Thirty freaking years, man.  That's like out to the year 2047."    All for $100. Cut back on your Iphone payment, car payment and starbucks already.  100 bucks will cut your payment in half and save you $100,000 in interest most cases.

Opinions are just theories.  I get the argument about paying extra if you want to but get the 30 'just in case' that $100/mo will actually matter.  I have free and clear rentals and can tell you that it won't.  Some of us are throwing $7k/mo+ at mortgages just because they bother us, are above 6% and the opportunity cost for our cash is low in the current environment.

Get a 30 year, but pay it like a 15 if your goal is to build equity more quickly. You'll have way more flexibility in qualifying for a new loan and if you have a couple lean months, you have the option to pay the regular payment.

I think it completely depends on your goals. If cash flow is your focus, go with the 30-year. If the cash flow doesn't impact your portfolio much right now and this is more of a long-term investment, go for the shorter term. Or weigh out how long until you can buy another property with each term loan and go with the one that will let you buy another one sooner. If the 30-year and $200/month will let you buy another one sooner, that may lead to more cash flow than the longer-term that holds you back from buying more. 

All just totally depends on your goals and how the numbers shake out.

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