30 year loan versus 15

12 Replies

I own two properties, (one was bought and one we built) both are duplexes.  Everything I listen to and most of the forums on BiggerPockets it seems focus on 30 year mortgages.  However, in my area (central Nebraska) I have yet to find a lender who will loan on an investment property for anything over 15 years and 10 years is preferred.  I have had a couple of lenders says they would loan up to 20 years in specific circumstances but most will not say what those circumstances are.  I have been to approximately 8 banks in our area and with the exception of two national/regional chain banks, the others are actually locally owned banks.  Another thing is that most any of the properties that I find will barely make the 1% rule and I have yet to find one at 2% or one that each door will cash flow at $200 as suggested, at least on a 15 year note.  

My brother and I (we are partners) generally view property as a savings account. For example, the first property (duplex) we purchased we paid $116,000 for and it rents for $650 per side or $1300 per month (this is the high end for the area). It is on a 10 year note and with PITI the payment is $1254 per month. We pay for any maintenance out of pocket as well as vacancies. However, we look at it as over the 10 years, even if we had to put $200 a month into the property (for Cap X expenditures, lost rent, maintenance etc.) that at the end of 10 years we will have a property that is worth $124,000 plus. In other words we contributed $24,000 to get $124,000 plus.

I guess my question would be, other than private financing or owner financing (both options I am exploring), how do others deal with the length of the loan? Especially to find and secure property that will cash flow at the 2% rule or $200 per door as suggested on this site. I am not in a position to drive to out of state locations repeatedly to look at property, and if I had to hire a property manager it would drastically increase my costs on a 15 year loan. Also, I own my own home and my wife loves it so buying a multi-family home on a FHA loan or something similar and living in it is out of the question. Any feedback/advice would be appreciated.

You’re not really cash flowing if you’re paying for all of your maintenance out of pocket. You should be able to cash flow, pay your maintenance out of the rent money and pay a PM and all your mortgages from rent. My guess is you’re not cash flowing because you have only 10 and 15 year notes. You want 30 year fixed and then if you can pay extra do for it but you don’t have to in the mean time If you don’t want to

30 year loans are fannie-backed products.  Have to find an originator that will sell to the secondary fannie market (which is where like 90% of residential mortgages go), not a local bank that holds loans in their portfolio.

I like 15 yr loans, but I am old and a few hundred bucks a month doesn't matter anymore.  The rates are way lower and they amortize down fast as heck.  Got a new one in Sept and almost half my payment is going towards principle already.

So this isn't a which is better comparison, it's a how do I get a 30yr loan with a partner question.  Maybe it's the ownership structure, but ether way, you need a lender that sells their loans to fannie/freddie @Wayne Connell If you own in an LLC, that's the issue. You've traded 'asset protection' for limited financing options.

If you don't care about getting spam e-mail the rest of your life, try lending tree or quicken/rocket mortgage maybe just to see.

You can get 30 year fix  interest rate from nationwide lender.  You should have positive cash flow in investment. 

@Wayne Connell As @Harjeet Bhatti has stated you don't have to restricted to your local market for 30-year fixed rate loans. Without knowing more details about your property, the 10-15 year terms are the reason why you're paying high monthly financing costs. If you get a 30 year rate loan, you will be paying a smaller monthly payment but the aggregate stream of payments you pay will be higher. 

In other terms, if you plan on holding this long-term, you're essentially front-loading your mortgage costs with a 10-15 year loan. It doesn't mean you're doing the wrong thing, it's just a different strategy - aggressively paying down debt vs. not being as aggressive. 

Keep in mind that the greater the equity you have obviously the lower your ROE. Your money will be earning less than in a GIC and your valuable investment property becomes a liability. The only thing generating any income is your own cash. 

Not really financially wise investing. This is why 30 year motgages are necessary.

Thank you to everyone who has replied to this point, I greatly appreciate the advice/view points given.  When I run the numbers with my particular purchase I would have to agree with Mr. Vaughan and Mr. Khan in that the 10/15 year notes work for my situation over the 30 year notes, even after factoring in what I could potentially contribute out of pocket.  I plan to retire within 15 years so I would prefer to be debt free at that point.  I do appreciate Mr. Khan your view that what I am doing is a different strategy and not necessarily the wrong way to go.  However, I do understand the importance of cash flow and I plan to try to focus more on that aspect with future purchases.

@Wayne Connell   

@Thomas S. is spot on. 

Let's not forget that a great reason to use long term financing for leverage is to hedge your monthly commitment against inflation. I'd rather commit to a much lower monthly payment knowing that as time goes on my payment remains fixed but that same amount of money is worth less than it is now. If your value and rents go up over time then you come out financial far ahead of the person that succumbed to the trap of "financial security means collecting rental income from a free and clear asset."

It's not the asset that generates your financial return. It's the debt. You just need to tune out about 90% of the investor crowd when it comes to their mortgage advice.

I had a long thread about the 15 vs 30. I was dead set on the 15 because of the lower rate & total interest savings. Now, I'm leaning more towards the 30 because of what the 15 yr does to my DTI. Despite having a higher rate, you can always send more to principal, but if you go the 15 year, your stuck & the hit to your DTI affects future purchases.

@Wayne Connell , I would give West Gate Bank in Lincoln Nebr.  a call. I have 3 loans with them,30 yr. that my bank sold to them as they only handle 15yr. or commercials loans in house.  I tried to give you email and phone number but BP DOESNT  ALLOW that info outside of marketplace. Pm me if you would like info. Good luck.

Buying for 10 or 15 year amortization is really aggressive. I think it would be better to simply actually open a savings account and put money in every month. Inflation calls for more time than 10 or 15 years in my opinion. Your savings account wont make holes in your wall. The advantage of real estate is that you can leverage it.

To answer your question, simply say you are buying another home.

Doesn't this mean the area isn't ideal for rental investments. I finance my homes at 15 yrs so I can retire at 50.  All of mine cash flow after all expenses. I fully understand the spend 24,000 to make 124,000 but if you look in other areas you can find better deals. 

I left Denver and moved to my small town because of the investment opportunities. 

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My bank hates 20 yr loans. However they did one. The special circumstance was 0 down. I borrowed 20% for the down payment from a family member at 5% for 5 years. I then financed the 4 unit complex for 5 yrs on a 20 yr am.  In 5 yrs I will have paid off the down and will renew the loan on the property for 7 yrs. The complex will be paid for in 12 yrs with 0 out of pocket. It cash flows 650 a month.  The bank is fully aware of this plan and thus agreed to the 20 yrs. 

My bank would not touch a loan that did not cash flow. 

Thank you Thomas S. and Mr. Collins, that does help me understand better why 30 year mortgages are more desirable.  Mr. Rien put me in touch with a bank that will do the 30 year mortgages so hopefully I will get everything on the right track.  

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