Rental Property Loan: 15 years term or 30 years term?

9 Replies

We are considering to buy a townhouse to rent -  diversifying assets is the primary reason. We are in Houston, TX.

Now my husband and I have difference when it comes to loan term: if 15 years loan, we are about to break even but much more asset accumulation with less interest. With 30 years term, we get 7% cash flow but hardly any asset accumulation in the first a few years.  

Which is the better way to go?

The question is actually which do YOU prefer? There are endless threads that debate these two terms. At the end of the day it always comes down to the investors preference.

Happy investing!

We only financed single family homes for 10 years, apartments for 20.  But now we use money from passive investors and pay interest only.  We have tons of equity in our single family homes, maybe 35-40% equity in our apartments, and about 10% in our properties that are financed with passive investors. So diversify. 

Thank you both for the reply. I guess there is no absolutely the better rule one way or another? I am new here. Would appreciate if anyone could point me to the past discussion related to this.

@May Zhou you can use the search tool to search your topic. It should pull up a lot of these discussions.
Depending on your situation, do you prefer the additional cash flow each month or a quicker debt pay down? If your strapped for cash and a large cap ex expense comes your way, the 30 year term may protect you since you’ll be making extra cash each month.

Originally posted by @May Zhou :

Thank you both for the reply. I guess there is no absolutely the better rule one way or another? I am new here. Would appreciate if anyone could point me to the past discussion related to this.

TLDR:

  • 30YF if it's mostly a short term cashflow play because you want to bump your income ASAP. This is a 100% valid goal, and probably the most common one we see on BP.
  • 15YF if it's mostly a long term "what are we leaving to our kids?" equity play because your household income is already there, but you're after long-term inter-generational tax-advantaged wealth (especially in California -- you don't have your location on your profile). This is a 100% valid goal.
  • Split the difference by getting a 30YF and paying extra like it's a 15YF if you absolutely can't decide. This is, also, 100% valid and not at all a bad hedge.
  • Just to make your life harder, did you know that there are also 25YF, 20YF, and even 10YF mortgages? The big pricing discontinuity/jump is at 15YF v 30YF, which is why these others aren't often talked about, but I thought I'd toss that out there for you.

@Chris Mason hit all the major choices and reasons behind them. If you have no rentals start with 30 year. Once you get to several or a lot, you can throw in some 15-25 year ones.

That’s what I plan to do anyways. Also look at interest rates sometimes there’s a large difference between 15 and 30 year.

Paying down the mortgage is the opposite of "diversifying assets". It is reducing your return on investment and amounts to no more than hoarding of useless cash.

You are doing no better than a 4-5% return on your cash (mortgage interest rate) as opposed to investing for maximum returns.

The better way is to invest your money.

Thanks to Arlan, Gab, Ken, Chris and Caleb for all your input. This clarified the issue for me. 

This is a nice place to get very sensible answers. Much appreciated. :) 

Originally posted by @May Zhou :

We are considering to buy a townhouse to rent -  diversifying assets is the primary reason. We are in Houston, TX.

Now my husband and I have difference when it comes to loan term: if 15 years loan, we are about to break even but much more asset accumulation with less interest. With 30 years term, we get 7% cash flow but hardly any asset accumulation in the first a few years.  

Which is the better way to go?

 i only take 15 yr loans and it has done me wonders.

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