How Common is 30 Year Financing? And how this affects analysis..

16 Replies

I have become a regular listener to bigger pockets and I’m a new real estate investor. I closed on my first deal in September (Quadplex and a House) and am under contract now for an 8 unit apartment complex.  My goal was 1 unit this year and it seems as if I'm about to have 13.

It seems to me the majority of time people in the podcast are talking about analyzing deals and cash flow and their goals they are basing it on a 30 year Finance. My first question, is: Is it common to find a 30 year Finance on an investment deal? Because in my area, banks will not even consider that! And they typically need board approval to even get 20. They push you hard to go 10-15, but I have been able to secure 20 at least. So how are people finding 30 year Finance deals on investment properties?

Next question....

This also makes a MASSIVE difference when you are analyzing cash flow for properties. I constantly hear on the podcast and elsewhere things such as: take your debt service, taxes & Insurance, maintenance, vacancy, mgmt, and perhaps cap-ex and then shoot for $100 a door after that. This seems to be brought up ALOT on the podcast, but is this typically based on a 30 year Finance? Because when dealing with 15 or 20, that’s much harder to do. Doable but harder.  I just wish shorter financing terms were discussed more because this changes things....

When people talk about the 2% rule, does this change based on Finance term of the property?

It just seems like I do not hear many dealings on the podcast with 15-20 year terms. Just curious....

Thanks!

Originally posted by @Dwain Roark, Jr. :

I have become a regular listener to bigger pockets and I’m a new real estate investor. I closed on my first deal in September (Quadplex and a House) and am under contract now for an 8 unit apartment complex.  My goal was 1 unit this year and it seems as if I'm about to have 13.

It seems to me the majority of time people in the podcast are talking about analyzing deals and cash flow and their goals they are basing it on a 30 year Finance. My first question, is: Is it common to find a 30 year Finance on an investment deal? Because in my area, banks will not even consider that! And they typically need board approval to even get 20. They push you hard to go 10-15, but I have been able to secure 20 at least. So how are people finding 30 year Finance deals on investment properties?

Next question....

This also makes a MASSIVE difference when you are analyzing cash flow for properties. I constantly hear on the podcast and elsewhere things such as: take your debt service, taxes & Insurance, maintenance, vacancy, mgmt, and perhaps cap-ex and then shoot for $100 a door after that. This seems to be brought up ALOT on the podcast, but is this typically based on a 30 year Finance? Because when dealing with 15 or 20, that’s much harder to do. Doable but harder.  I just wish shorter financing terms were discussed more because this changes things....

When people talk about the 2% rule, does this change based on Finance term of the property?

It just seems like I do not hear many dealings on the podcast with 15-20 year terms. Just curious....

Thanks!

 You are a smart guy to ask the question. People who do 30 year financing are bad at math. Imagine getting a place paid off in 15 years instead of 30. The amount that goes into your pocket instead of the bank's is staggering. It's worth the pain to do 15 year instead of 30 year.

Your best option is 30 year mortgages and then once you hit critical mass, you take your extra cash flow and stick it all to one mortgage at a time.

This is what I plan to do once I hit 6-8 properties. This will accelerate paying off mortgages to about one every 4 years or so.

@Account Closed There are actually very many reasons to go for a 30yr loan rather than a 10 or 15. And wanting to pay off property may be short sighted.

Money tied up in a property is not doing anything for you besides avoiding 4-5% interest. Instead, you could stay borrowed against the equity and put that money towards additional investments assuming they generate additional income. 10+% CoC returns are easy to find.

To the OP, yes, 30 year loans on residential (1-4) units are very common. Commercial is generally shorter.

I really appreciate the comments. I’m still looking for the answers to the questions posted...

1) How and where are people finding 30 year financing on investment properties? This is not an option with any bank I talk to in my area.

2) On the podcast and everywhere else, when people are discussing deal analysis, it’s almost always based on a 30 year Finance. Typically people say after debt service, taxes & Insurance, maintenance and repairs, vacancy, and management, you still want to shoot for $100 a door minimum. But I am assuming this is usually based on a 30 year Finance? So what are the recommended numbers for a 20 year?

I actually am under contract for 8 unit deal now. It’s a 2.2% deal, so getting 2.2% of purchase price on monthly rent. After all of those things listed above I am coming out at roughly $100 a door, and this is on a 20 year Finance.

I kind of wish people on the podcast would discuss different AM schedules, because it seems like it is ALWAYS 30 and maybe I just haven't looked long and hard enough, but I haven't found a bank willing to do that for Multi Family or SFR.

I know many will say it’s because for the 8 unit I’m gettin and the 5 unit I have, I have to do portfolio or commercial financing but I can’t get a bank to even do a SFR at 30 AM in my area. 20 is the max I can find.

I will say I am being forced to learn quickly. My goal was to have 1 unit this year as this is my first year. I closed on my first deal (5 units) in September, and will be closing on my second (8 units in December). So basically in 4 months time, I will have acquired 13 units.

I've never seen commercial financing at longer than 25 years, 15 or 20 being the standard (with 5-10yr balloon).
This is what makes the smaller apartment buildings hard to work. If the same capital can buy you two quads or one 8-unit all other things being equal), due to financing terms you're better off with the two quads.

In my experience, finding a 2% deal (in a non D minus area) is like finding a unicorn, so if you've really found one then congrats!

Keep searching for lenders. My commercial lender gave me 30’year amortization on a 6 unit apartment I bought in July, so it’s not impossible. They are local to my area though. Definitely helps the cash flow

Originally posted by @Christian Wathne :

Bill T. There are actually very many reasons to go for a 30yr loan rather than a 10 or 15. And wanting to pay off property may be short sighted.

Money tied up in a property is not doing anything for you besides avoiding 4-5% interest. Instead, you could stay borrowed against the equity and put that money towards additional investments assuming they generate additional income. 10+% CoC returns are easy to find.

To the OP, yes, 30 year loans on residential (1-4) units are very common. Commercial is generally shorter.

 As you wish. ;-)  I've been at this for 30 years so I have a different perspective.

Here are a couple of things for your consideration (and anyone else investing)

1) Nobody who had a "paid off" property lost it to foreclosure in the last 5 real estate down cycles  (This is a BIG thing)

2) You can always borrow against a "paid off" property if you need to

3) All the money coming from rents is PROFIT after the loan is "paid off"

4) You can't begin to guess what the next 30 years will bring and you are making assumptions you have no right to make about how "safe" a 30 year mortgage will be.

5) You have a LOT more flexibility when it comes to "paid off" properties than properties that have "liens" (mortgages) against them. 

6) By paying off the properties faster, you can borrower against them in the future to scoop up great deals from people who didn't plan ahead and have 30 year loans and need to sell fast. 

7) My point is: treat it like a business. Wishful thinking is not a business plan.

But, here are the numbers:







Term 30 years 15 years

Purchase $200,000 $200,000

Down 20% $40,000 $40,000

Loan $160,000 $160,000

Interest 4% 4%

Payment $764 $1,184






Year 1 $9,168 $14,208

Year 2 $9,168 $14,208

Year 3 $9,168 $14,208

Year 4 $9,168 $14,208

Year 5 $9,168 $14,208

Year 6 $9,168 $14,208

Year 7 $9,168 $14,208

Year 8 $9,168 $14,208

Year 9 $9,168 $14,208

Year 10 $9,168 $14,208

Year 11 $9,168 $14,208

Year 12 $9,168 $14,208

Year 13 $9,168 $14,208

Year 14 $9,168 $14,208

Year 15 $9,168 $14,208

Year 16 $9,168 $0 Free & Clear

Year 17 $9,168 $0 Free & Clear

Year 18 $9,168 $0 Free & Clear

Year 19 $9,168 $0 Free & Clear

Year 20 $9,168 $0 Free & Clear

Year 21 $9,168 $0 Free & Clear

Year 22 $9,168 $0 Free & Clear

Year 23 $9,168 $0 Free & Clear

Year 24 $9,168 $0 Free & Clear

Year 25 $9,168 $0 Free & Clear

Year 26 $9,168 $0 Free & Clear

Year 27 $9,168 $0 Free & Clear

Year 28 $9,168 $0 Free & Clear

Year 29 $9,168 $0 Free & Clear

Year 30 $9,168 $0 Free & Clear

Total Paid $275,040 $213,120







Savings $61,920





Originally posted by Account Closed:
Originally posted by @Christian Wathne:

@Account Closed There are actually very many reasons to go for a 30yr loan rather than a 10 or 15. And wanting to pay off property may be short sighted.

Money tied up in a property is not doing anything for you besides avoiding 4-5% interest. Instead, you could stay borrowed against the equity and put that money towards additional investments assuming they generate additional income. 10+% CoC returns are easy to find.

To the OP, yes, 30 year loans on residential (1-4) units are very common. Commercial is generally shorter.

 As you wish. ;-)  I've been at this for 30 years so I have a different perspective.

Here are a couple of things for your consideration (and anyone else investing)

1) Nobody who had a "paid off" property lost it to foreclosure in the last 5 real estate down cycles  (This is a BIG thing)

2) You can always borrow against a "paid off" property if you need to

3) All the money coming from rents is PROFIT after the loan is "paid off"

4) You can't begin to guess what the next 30 years will bring and you are making assumptions you have no right to make about how "safe" a 30 year mortgage will be.

5) You have a LOT more flexibility when it comes to "paid off" properties than properties that have "liens" (mortgages) against them. 

6) By paying off the properties faster, you can borrower against them in the future to scoop up great deals from people who didn't plan ahead and have 30 year loans and need to sell fast. 

7) My point is: treat it like a business. Wishful thinking is not a business plan.

But, here are the numbers:







Term 30 years 15 years

Purchase $200,000 $200,000

Down 20% $40,000 $40,000

Loan $160,000 $160,000

Interest 4% 4%

Payment $764 $1,184






Year 1 $9,168 $14,208

Year 2 $9,168 $14,208

Year 3 $9,168 $14,208

Year 4 $9,168 $14,208

Year 5 $9,168 $14,208

Year 6 $9,168 $14,208

Year 7 $9,168 $14,208

Year 8 $9,168 $14,208

Year 9 $9,168 $14,208

Year 10 $9,168 $14,208

Year 11 $9,168 $14,208

Year 12 $9,168 $14,208

Year 13 $9,168 $14,208

Year 14 $9,168 $14,208

Year 15 $9,168 $14,208

Year 16 $9,168 $0 Free & Clear

Year 17 $9,168 $0 Free & Clear

Year 18 $9,168 $0 Free & Clear

Year 19 $9,168 $0 Free & Clear

Year 20 $9,168 $0 Free & Clear

Year 21 $9,168 $0 Free & Clear

Year 22 $9,168 $0 Free & Clear

Year 23 $9,168 $0 Free & Clear

Year 24 $9,168 $0 Free & Clear

Year 25 $9,168 $0 Free & Clear

Year 26 $9,168 $0 Free & Clear

Year 27 $9,168 $0 Free & Clear

Year 28 $9,168 $0 Free & Clear

Year 29 $9,168 $0 Free & Clear

Year 30 $9,168 $0 Free & Clear

Total Paid $275,040 $213,120







Savings $61,920





 Unless there is a pre-payment clause, you can just pay it off in 15 years anyway. The 30 year term gives you the option to pay less if you need to. 

Account Closed

While I respect your opinion, I disagree with it. 

I don't want to not make any cash flow (or greatly reduced cash flow) for 15 years so I can have a "paid off" property. That may work for you, but not for me.

Everything I own is on a 30 year mortgage and I get maximum cash flow. That cash flow greatly increases my annual income. I'm all about the cash flow and I do not believe in paying down mortgages for some sort of safety net. My safety net is my income and cash flow from real estate. It is what pays those mortgages.

402-965-1853

Fannie is out there creating a secondary market for 30-yr residential mortgages even for rental/investment properties so I don't know why they wouldn't be available to you @Dwain Roark, Jr.   

I just did a brrrr on a rental and a 30yr fixed was definitely available.  Perhaps your pegs don't fit perfectly into fannie's little holes for some reason.   Mine was a little tougher since I haven't had a w-2 job in 15 years so I hear ya.

Account Closed I agree with you (mostly).  The rate on my 15s is always better than the 30.  In your example, it's the same but I take your point.  When a 15 is done, a 30 still has 75% left to go! 

I recently refinanced a little rent house and the rates were 4.625% for a 30 vs 4.25% for a 15.  I took the 15 simply because a couple hundred bucks a month doesn't matter anymore and something happens deep down in you when you actually own RE with no payments anymore.  

I'm not doing this so I get to keep payments out into my 60s and 70s.

The word mortgage, which is derived from the French word - muerte- means 'til death.  I'd rather have a til death that only lasts 15 yrs, thank you.

I paid off a bunch of mortgages this year.  All have had higher rates (over 6%) or commercial loans that are callable, adjustable, with shorter terms and bothering me.  

Not all debt is the same so it makes me flinch when folks have hard and fast rules about always taking out the longest terms possible.

Originally posted by @Account Closed :
 People who do 30 year financing are bad at math.

 

There is a difference between being bad at math, versus being bad at economics.  And people who like 15 year mortgages are bad at economics.  While you may end up paying more physical dollars in the 30year loan, the 'true cost' is going to be almost identical.  A dollar loses purchasing power over the years due to inflation, therefor a dollar today is 'worth' a lot more than a dollar 30 years from now.  A 15 year loan pays a large sum of money in the first few years when each of those dollars is worth a lot, where as a 30 year loan spreads it out to where those dollars in years 20-30 aren't worth much at all.  Once you factor in the purchasing power of money, the two loan systems become nearly identical. 

The difference then isn't in the raw math, it is in the fact that a 30 year loan is generally speaking much safer.  While paid off properties are very secure, you still had to get through 15 years of high payments in order to get to that point.  It is much easier to survive a crash if you are only paying 9,168 a year in mortgage payments, then if you have to come up with 14,208 every year.  What happens if one year you can only come up with 12k?  While your house is being foreclosed on, I just cash flowed 3k. 

Most loans don't have a prepayment penalty, so why not get a 30 year loan, and if you really like free and clear properties simply pay extra towards the principle every month?  There is nothing that says you cant pay a 30 year loan off in 15, or a 15 year loan off in 10 ect.  But having the option to pay that much lower mortgage amount of a 30 year loan is invaluable especially during rough times.

As for myself I prefer to not pay off properties.  I would not be happy with any investment where it's true return on investment was in the 4-5% range, so why would I allow dead equity to generate that amount by reducing interest payments?

@Carl Pickens @Anthony Gayden @Steve Vaughan @Ben Zimmerman  

I used to think the same thing. But the last two down cycles convinced me that long term holders face a very real threat of market crashes (no, of course THAT will never happen again ;-).  Also, the fact that predicting the next thirty years with 200 Trillion in unfunded liabilities is impossible. 

Interesting that no one addressed my number one reason (in post above)

1) Nobody who had a "paid off" property lost it to foreclosure in the last 5 real estate down cycles (This is a BIG thing)

As Carl says, "you can just pay it off in 15 years anyway" but people lack the discipline to remain consistent for 15 years doing such. 

You cut your risk in half by paying it off in 15 years andI can look forward to the next down turn. I will be doing what Warren Buffet does, buying on the cheap.

@Bill T has good points. I currently have 2, 15 year mortgages myself. Right now I'm trying to expand and one reason I'm refinancing to 30-year is because it helps me get my DTI down.

I'm also in my mid 20's 

The OP's question is "are 30 year amortization commercial loans available".  Not "should I get a 30 year loan".  The short answer is no, commercial loans are almost always shorter amortization than 30 years.  For 1-4 unit residential properties you should be able to get 30 year loans.  They are available, provided you meet the Fannie/Freddie rules.  If you local banks don't off these, that's their requirement, not Fannies or Freddies.

Residential Financing - For 1-4 family properties, most investors are able to get 30 year fixed rate financing through and mortgage brokers.

Commercial Financing - 5+ units will need to be financed through the commercial side of the bank or through a commercial mortgage broker.  The typical lending product for 5+ apartment units in most markets is a 5 year fixed rate commercial mortgage with a 20 year amortization.  In many markets, you can find a 7 year fixed rate and/or 25 year amortization.  When you get to larger properties, 30 year amortization and 10 year fixed rates are common.  I'd call every community bank, credit union, and mortgage banker in your area until you find favorable terms.  My commercial mortgage has a 25 year term, fixed for 7 years, and variable for the remaining 18 years (no balloon).

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