Those who finance investment properties
Denver, CO · Member since 2017 · 142 posts · 104 votes
Always go with the 30...and the lower payments. Your goal with a rental is cash flow...not the payoff. Your tenants pay off your property for you. You are not saving interest, you are losing cash flow. You are thinking like a homeowner and not like an investor.
Interest = Tax deductible
Having more cash flow from the property = greater ROI
If you are a new investor, there is a good chance, probably a 50-100% probability you will refi a 15 year mortgage within 5-10 years to pull out equity or for some other reason. Not everyone will but we get complacent owning property.
Franklin
@Erik W. now take that @263/mo savings (3,156/yr) and reinvest it @4% for 15 years. You end up with ~65,000 - (12*3156) = 27128 you have gained.
There are lots of strategies, one of them being when you need the cash. If you need it immediately, go for the 30 yr loan to increase cashflow.
Great discussion! It's clear to see that there are as many philosophies as there are investors out there. No doubt many here have been successful using 15 year terms and many have found success using 30 year terms.
@Alex Corral There is no one right way to do this.
What matters is that your logic makes sense to you and that it mitigates the risks that you perceive in each investment. There's also no law against being open to other thought processes and pivoting your strategy over time. This kind of dialogue makes us all better investors in the long run.
Thanks for sharing everyone.
@Erik W. now take that @263/mo savings (3,156/yr) and reinvest it @4% for 15 years. You end up with ~65,000 - (12*3156) = 27128 you have gained.
There are lots of strategies, one of them being when you need the cash. If you need it immediately, go for the 30 yr loan to increase cashflow.
To each their own. But to say if you invest the spread and make $27,128 runs contrary to the statement a few sentences later where you said, "if you need it immediately." Gotta pick one or the other: need/spend now vs. long-term investment.
You got me interested with this train of thought. So I analyzed the "invest the spread" thought...we have to go all 30 years to make an apples to apples comparison.
Over 30 years, $3,156 per year invested at 4% yields a total return of $92,560 interest, but that must be netted against the cost of $38,726 in extra interest paid. So net gain of $53,834. Over 15 years, if we take the $760 P&I ($9,120 per year) that was going to the bank and invest at 4%, it yields $62,239 and without any extra interest paid. The percentage ROI is lower on the 15-year since both P&I are being used to invest, but overall the dollar amount earned is still higher. So even assuming a fairly healthy return on today's market (find me a "safe" investment paying 4%!), the 15-year investor still comes out about $9,000 ahead in terms of total dollars in one's pocket, and that also limits risk of losing the property during years 16-30.
I understand everyone has their own strategy, and I not sure quibbling about $9,000 over a 30 year term is worth our time. I am more concerned with people who use phrases like "tenants pay for X". That is sloppy thinking. Tenants also "pay" for maintenance, mowing, property management, etc, but we don't use that as an excuse not to limit those expenses as much as possible. Bottom line is money not in my pocket is money in someone elses' pocket, which is why I think the name of this site (BiggerPockets) is very aptly chosen.
The people acting like it's a no-brainer are wrong. And when they say it's your tenants paying the mortgage for you that doesn't make sense in this context. Your tenants are paying you and you are paying off the mortgage. If your mortgage is paid sooner, then all the money your tenants pay stays in your pocket. Of course that is a positive! Your cash flow is smaller for the first 15 years and then much much higher for years 16-30.
However, the question is whether the higher cash flow in the short term is more beneficial to you in the long run. If you are able to continue leveraging it could be. If you think you would sell in the next 10 years it could be. If you can somehow predict interest rates 15 years from now will be very high then it could be. There's probably many other factors to consider too. It's a good question that is very dependent on your situation. And remember that things don't always go as planned so higher cash flow/lower payments are safer in that regard.
Whose money is paying the mortgage? The tenants money...and whatever isn't used on expenses is your money. The more money left over is more money for you. The tenant pays all the bills, as long as you have positive cash flow. Don't help them.
@Alex Corral I'm agree with @Maxwell Lee
The fact that you have an income from the rent, this doesn't mean that they are paying the loan, or what happens when the property is empty, you have to continue paying. However, I agree that sometimes it is better to have security in the cash flow, although that faster pay in 15 years, it could be better to choose the 30 years because it allows you to cover unexpected expenses or that additional money can help you to invest in other properties.
@Alex Corral I'm agree with @Maxwell Lee
The fact that you have an income from the rent, this doesn't mean that they are paying the loan, or what happens when the property is empty, you have to continue paying. However, I agree that sometimes it is better to have security in the cash flow, although that faster pay in 15 years, it could be better to choose the 30 years because it allows you to cover unexpected expenses or that additional money can help you to invest in other properties.
Bills/expenses paid from passive income is paid by the source of that income.
When you have a vacancy, the 30 mortgage payment is easier to cover.
You can always pay off a 30 year loan in 15 years...you can't pay a 15 year loan in 30.
Here's one more item not mentioned...and it's a big one:
When you refinance or sell the property in less than 15 years, all that extra interest you are paying will never be recovered. You don't see the benefits of the faster payoff until at least 3 - 5 years after you've paid it off (year 18 or later). If you don't hold it that long, or if you refi before then, all you've done is add to the cost of the loan.
@Alex Corral I'm agree with @Maxwell Lee
The fact that you have an income from the rent, this doesn't mean that they are paying the loan, or what happens when the property is empty, you have to continue paying. However, I agree that sometimes it is better to have security in the cash flow, although that faster pay in 15 years, it could be better to choose the 30 years because it allows you to cover unexpected expenses or that additional money can help you to invest in other properties.
Bills/expenses paid from passive income is paid by the source of that income.
When you have a vacancy, the 30 mortgage payment is easier to cover.
You can always pay off a 30 year loan in 15 years...you can't pay a 15 year loan in 30.
Here's one more item not mentioned...and it's a big one:
When you refinance or sell the property in less than 15 years, all that extra interest you are paying will never be recovered. You don't see the benefits of the faster payoff until at least 3 - 5 years after you've paid it off (year 18 or later). If you don't hold it that long, or if you refi before then, all you've done is add to the cost of the loan.
It's very clear that a 30 year payment is easier to cover. That's why if you take a 15 year, you need to take the steps to make sure you can cover the extra cost. As rents go up, this should become easier. You can pay off a 30 in 15, but at the expense of a higher interest rate.
If you refi or sell the property in less than 15, you should also have more cash in equity just from the faster pay-down. Many ways to skin this cat. I still like the 15 year option better.
Also, what is your reasoning for preferring to have 20 mortgages, than 20 free and clear?
@Alex Corral I'm agree with @Maxwell Lee
The fact that you have an income from the rent, this doesn't mean that they are paying the loan, or what happens when the property is empty, you have to continue paying. However, I agree that sometimes it is better to have security in the cash flow, although that faster pay in 15 years, it could be better to choose the 30 years because it allows you to cover unexpected expenses or that additional money can help you to invest in other properties.
Bills/expenses paid from passive income is paid by the source of that income.
When you have a vacancy, the 30 mortgage payment is easier to cover.
You can always pay off a 30 year loan in 15 years...you can't pay a 15 year loan in 30.
Here's one more item not mentioned...and it's a big one:
When you refinance or sell the property in less than 15 years, all that extra interest you are paying will never be recovered. You don't see the benefits of the faster payoff until at least 3 - 5 years after you've paid it off (year 18 or later). If you don't hold it that long, or if you refi before then, all you've done is add to the cost of the loan.
It's very clear that a 30 year payment is easier to cover. That's why if you take a 15 year, you need to take the steps to make sure you can cover the extra cost. As rents go up, this should become easier. You can pay off a 30 in 15, but at the expense of a higher interest rate.
If you refi or sell the property in less than 15, you should also have more cash in equity just from the faster pay-down. Many ways to skin this cat. I still like the 15 year option better.
Also, what is your reasoning for preferring to have 20 mortgages, than 20 free and clear?
If rents go up, they go up for both of us equally.
If you make the same payment on a 30 to pay it off in 15, you will pay down the principle faster due to the interest applied each month being lower, you are paying more on the principle.
If you refi a 15 before 15, you won't have that much more equity to make a difference, however you will have made higher interest payments up to that point that will be more than the added equity (and you only get 75% of that equity) back when you refi.
20 mortgages over 20 free and clear was in the context of the entire discussion...not a stand alone statement. If I have to do 20 15 year mortgages to get there, I'd rather have 20 30's (we're talking about the last 15 years of a 30 year mortgage...when you would have the 15's paid off). 20 properties, with accumulated added cash flow, is enormous. If you only took the amount you would have paid in added interest (that's a cost), and used it to invest in another property, you would be way ahead.
It isn't just the face value difference...it's more about the compounding effect of the investment potential of that added cash flow.
There's a 1 to 1 relationship between that added interest going out and into the lenders pocket...and it's going the wrong direction.
There's a compounding relationship between reinvesting that extra cash flow, and that money is going the correct direction.
. 15 year 30 year
Loan $80,000 $80,000
Term 15 years 30 years
Interest 5.5% 4.5%
Mo Pmt $653.57 $405.35
Extra Pmt N.A. $248.32
Adjusted Payoff N.A. 16yr; 3 mo
Total Interest Paid $37,660.02 $27,269.75
@Alex Corral I'm agree with @Maxwell Lee
The fact that you have an income from the rent, this doesn't mean that they are paying the loan, or what happens when the property is empty, you have to continue paying. However, I agree that sometimes it is better to have security in the cash flow, although that faster pay in 15 years, it could be better to choose the 30 years because it allows you to cover unexpected expenses or that additional money can help you to invest in other properties.
Bills/expenses paid from passive income is paid by the source of that income.
When you have a vacancy, the 30 mortgage payment is easier to cover.
You can always pay off a 30 year loan in 15 years...you can't pay a 15 year loan in 30.
Here's one more item not mentioned...and it's a big one:
When you refinance or sell the property in less than 15 years, all that extra interest you are paying will never be recovered. You don't see the benefits of the faster payoff until at least 3 - 5 years after you've paid it off (year 18 or later). If you don't hold it that long, or if you refi before then, all you've done is add to the cost of the loan.
It's very clear that a 30 year payment is easier to cover. That's why if you take a 15 year, you need to take the steps to make sure you can cover the extra cost. As rents go up, this should become easier. You can pay off a 30 in 15, but at the expense of a higher interest rate.
If you refi or sell the property in less than 15, you should also have more cash in equity just from the faster pay-down. Many ways to skin this cat. I still like the 15 year option better.
Also, what is your reasoning for preferring to have 20 mortgages, than 20 free and clear?
If rents go up, they go up for both of us equally.
If you make the same payment on a 30 to pay it off in 15, you will pay down the principle faster due to the interest applied each month being lower, you are paying more on the principle.
If you refi a 15 before 15, you won't have that much more equity to make a difference, however you will have made higher interest payments up to that point that will be more than the added equity (and you only get 75% of that equity) back when you refi.
20 mortgages over 20 free and clear was in the context of the entire discussion...not a stand alone statement. If I have to do 20 15 year mortgages to get there, I'd rather have 20 30's (we're talking about the last 15 years of a 30 year mortgage...when you would have the 15's paid off). 20 properties, with accumulated added cash flow, is enormous. If you only took the amount you would have paid in added interest (that's a cost), and used it to invest in another property, you would be way ahead.
It isn't just the face value difference...it's more about the compounding effect of the investment potential of that added cash flow.
There's a 1 to 1 relationship between that added interest going out and into the lenders pocket...and it's going the wrong direction.
There's a compounding relationship between reinvesting that extra cash flow, and that money is going the correct direction.
This isn't necessarily equal either though - you're going to normally get a better interest rate on a 15 compared to a 30 year note. To add to the calculations as well, you get 27.5 year depreciation no matter which term you do. I think the big thing for me throughout the entire thread is will someone really use that extra cash flow to it's absolute best use completely? If so then maybe the argument for 30 year notes applies but you rarely see people show that much discipline. Very interesting that people are so polarized either way.
@Alex Corral we have gone both ways on this. We have properties now with 15, 20 and 30 year mortgages. We were just reviewing our outstanding loans and noticed a 15 year mortgage from 2012 is ten years from pay off and the principal is paying down fast. The 30 year we took around the same time still has 25 years left. So although the cash flow is great, getting one paid off in 10 years versus 25 seems way better at this point.
Part of this depends on your goals. Many people subscribe to the "more doors" and "more leverage" theory. That is a good strategy if you want to scale fast and large.
Other people want to keep the number of units manageable and would rather maximize cash flow from a smaller number of properties.
Look at it another way, if you had a small number of paid off properties, you could replenish enough CASH every couple years to buy properties outright and avoid mortgages all together.
Less leverage is more power, but lower ROI. A cash buyer with no debt is going to be in the best position to buy properties when opportunity arises. At the same time, more cash into an investment reduces your ROI. That is because your return stays constant, so increasing the investment reduces the ROI. That is why leverage is very powerful.
It is all trade offs and the right answer depends on your personal goals and risk tolerance.
@Alex Corral As an investor, I invest for the sole purpose of regular Cash Flow because you gotta remember that 3 30-year mortgages would outlive most human beings. In addition, the tenants are paying the mortgage for you unless you are living in the property. You always want to keep your costs, which is the quintessential rule of businesses.
Goodluck. Thanks! - Ola
. 15 year 30 year
Loan $80,000 $80,000
Term 15 years 30 years
Interest 5.5% 4.5%
Mo Pmt $653.57 $405.35
Extra Pmt N.A. $248.32
Adjusted Payoff N.A. 16yr; 3 mo
Total Interest Paid $37,660.02 $27,269.75
Shorter term loans generally have lower interest rates, so this is not a real world comparison. If we assume the interest rate is the same, the payoff and interest paid would be roughly the same. Interest is calculated on the outstanding balance. When you increase your payment on a 30 year loan to match a 15 year loan, you essentially end up with the same term and interest paid. The advantage on a 15 year comes from a lower interest rate and forced pay down. The advantage of a 30 year is lower mandatory payment.
Adam, I'm going to throw my two cents worth. Why are you putting 20% down on properties? I buy undervalued properties (mostly distressed), rehab, then refinance them (BRRR strategy). I'm more concerned about the 20% you are leaving on the table. For example, a couple of months ago I bought a duplex for $32,500. The rehab costs were around 30k and the property should appraise for 85k so I will be able to pull my initial investment back out. The units will rent for $625 each and I will cashflow just under $400 per month inclusive without coming out of pocket with any funds. I do finance over 15 years, however, I want to retire in about 10 years so I plan on paying the majority of my properties off within the next 5 years. Just my thoughts!
As usual, I'm going to agree with Mr. V. - longer mortgage and more cash flow - especially early in your investing where you need to keep every penny of cash you can get your hands on.
If you were sitting on a big mound of cash (100k) then I could maybe see going with a 15 yr mortgage if your goal was to pay it off quick and if the thing was cash flowing anyway.
But given that with a 15 yr mortg you're saying there is very little cash flow, that just seems to be creating more risk in your investing.
How will you grow your reserves for any big repairs in the future? How will you grow your reserves to come up with a down payment on future deals?
I want every penny of cash flow I can get. Now I don't know if I'd want to burn a conventional loan spot (you only get 10) on a mortgage thats only 60k, but in the beginning, its all about cash flow.
You can always refi them later on into a commercial loan under an entity if you go over 10. But in those early years, its so tough to make the numbers work that I would have to suggest the 30 yr mortgage in almost any scenario..
I’ve read and personally leverage as much as possible with a 30 year. If you can arbitrage and make more money than what you are paying, then take the lower interest rate for the longest period. Use OPM to generate more money for you. It helps you scale. If you have any hiccups in your operation I would rather make the lower payment on a 30, than be committed to the higher 15 year payment.
The only thing I am wondering is why you are investing in a 15 yr. mortgage, yet only generate $100 per month cash flow. Hopefully it takes into account capex and maintenance. What is your ROI or cash on cash return? If those numbers are greater than your interest payment, then you are good. I have met investors that only pay cash, while others are highly leveraged. Everyone has their own scenario they must be comfortable with as their strategy. I personally hate to see dead equity not working.
@Justin Stiffler your comment has made the most sense to me thus far. There is a lot of back and forth here like one is right and one is wrong. It depends on the type of investment. I'd personally love to have my self set up with five 30 yr MFH and five 15yr SFH by the time I am able to leave my job and commit to REI full time. Optimally the MFH would bring in majority of the cash flow and the SFH would provide equity to leverage when needed and then eventually in the long term add a large amount of cash flow after being paid off.
. 15 year 30 year
Loan $80,000 $80,000
Term 15 years 30 years
Interest 5.5% 4.5%
Mo Pmt $653.57 $405.35
Extra Pmt N.A. $248.32
Adjusted Payoff N.A. 16yr; 3 mo
Total Interest Paid $37,660.02 $27,269.75
Joe, I think the numbers here are wrong.
This is what I'm getting with an online amortization calculator:
15 year 30 year
Loan $80,000 $80,000
Term 15 years 30 years
Interest 4.5% 5.5% (30 year rates are always higher)
Mo Pmt $612 $454
Extra Pmt N.A. $158
Adjusted Payoff N.A. 16 yr; 3 mo
Total Interest Paid $30,159 $83,523
$53,634 is a HUGE amount of money to be giving the bank.
@alex corral
What’s your end goal? Are you looking at this as a retirement or to get into real estate and make this your full time income?
Full time income - I’d go 20yrs, 30yrs for me is to long! But as a income you need CASHFLOW!! but for a few bucks more you could be free of the debt 10yrs sooner! (Mine are all at 15-20yrs) longer term = more cashflow SIMPLE.
As a retirement - your not looking for income per se your looking for tax advantages and appreciation - I’d still go 20yrs I just couldn’t fathom taking 30years to pay for a property!
Your going to get a 100 different opinions about how to go about it, everyone has a reason to do it there way - for me, 15-20 years I’ll have enough to do whatever I want and not worry about paying the mortgage which always equals to less stress - that’s my 2cents!
@Matthew Couto
My end goal is to own 5-10 properties free and clear, when I'm older and less likely to be wanting to work. I would rather bust my @ss now, and pay into the mortgages so that I can retire early and live off the rents. My personal home is also on a 15 year, and should be paid off in about 10 years. I just hate to see losing all that money in interest. Especially on mortgages, where the interest is compounded so heavily. I don't want to be worrying about mortgage payments in my 70s.