Rental Property Investor · Washington, DC · Member since 2019 · 28 posts · 21 votes
I’m in the process of buying my first rental property. My credit union is offering 3.1% on an15 year while another lender is offering 4.87% on an 30 year for investment properties. I’m 46 and aim to retire by 65. With only 20 years on the retirement horizon, do I go with a 15 year or 30 year mortgage?
A couple considerations:
-my goal now is but and hold. in retirement it would make sense to have all the rent come on as cash flow and not have to pay down a mortgage.
-in my area, prices are expensive, so I my rent would not quite cover the Monthiy expense even for a 30 year mortgage. This means even more out of pocket for a 15 year!
I made a mistake doing a 15 year on one of my rentals. The reality is you will have a little bit higher rate doing a 30 BUT you can always pay at a 15 year rate. When market went down and oil went to $25 a barrel my unit went unrented for 3 months. I ate 2,100 month being on a 15 year. That was the time I wished I was on a 30 year paying $1400 or so while times weren't so good. Take what your 15 year payment would be and pay it on a 30 and you'll have it paid off in 15 BUT if for some reason your vacant or a big repair comes you aren't tied to a higher mortgage.
30 year on every rental. If you have positive cash flow (and you better) then you're not the one paying down the mortgage...your tenant is...regardless of the length of the mortgage.
30 year on every rental. If you have positive cash flow (and you better) then you're not the one paying down the mortgage...your tenant is...regardless of the length of the mortgage.
Thanks for the input Joe. A separate question on positive cash flow from what I read vs. investors that I speak with. Some say positive cash flow is the rent covering PITI & HOA (if its a condo). In your experience, should the rent cover the PITI, HOA and also a monthly amount for maintenance/capex? If so, that will be nearly impossible in the DC and surrounding suburbs! I'm curious on which parts of the country investors can generate positive monthly cash flow.
30 year on every rental. If you have positive cash flow (and you better) then you're not the one paying down the mortgage...your tenant is...regardless of the length of the mortgage.
Thanks for the input Joe. A separate question on positive cash flow from what I read vs. investors that I speak with. Some say positive cash flow is the rent covering PITI & HOA (if its a condo). In your experience, should the rent cover the PITI, HOA and also a monthly amount for maintenance/capex? If so, that will be nearly impossible in the DC and surrounding suburbs! I'm curious on which parts of the country investors can generate positive monthly cash flow.
I don't, because using part of the rent every month to cover these things is a fool's errand. This is another example of why you should never use percentages as a tool to measure the quality of an investment. Those "extra" items need to be covered, but there are plenty of better ways to do this...that actually work, and won't ruin good deals in the process.
I was hoping you would say that... @Joe Villeneuve Some of these books (one I purchased from Bigger Pockets) pads all these additional expenses into monthly cashflow, which means ALOT of deals are thrown out.
Cashflow to most investors is worthless. If your property is positive $200/mo, so what? You gonna get 50 properties so you can have $10k per month? Once you have 10 paid off properties you’ll have at least that and 10k in cashflow even if you have a. Property manager.
Saying your tenant is paying the interest on your mortgage is like saying you can gamble at the casino when you’re ahead because you’re playing with the houses money. It’s not the casino’s money when it’s in your hands and the tenant isn’t paying the interest, you are. Otherwise why bother shopping interest rates, the tenants paying it anyway.
If you can afford the 15 year go for it.
In your example for every $100k:
$695/mo and $38.6k balance in 10 years vs $529/mo and $81k balance. So giving up $165/mo (an extra $19,800) lowers your balance by $42,500. that means your average balance for 10 years ($9900) earns $23,700
If $165/mo makes a rental property a bad deal, don’t buy it. It’s saving you $198/mo in interest. plus for the 2nd 15 years your cashflow will be plus $529/mo.
So 15 years of minus $165 and then 15 years of plus $529.
I made a mistake doing a 15 year on one of my rentals. The reality is you will have a little bit higher rate doing a 30 BUT you can always pay at a 15 year rate. When market went down and oil went to $25 a barrel my unit went unrented for 3 months. I ate 2,100 month being on a 15 year. That was the time I wished I was on a 30 year paying $1400 or so while times weren't so good. Take what your 15 year payment would be and pay it on a 30 and you'll have it paid off in 15 BUT if for some reason your vacant or a big repair comes you aren't tied to a higher mortgage.
In his case paying the 15 year payment on the 30 year loan will cost him 1.75% higher rate per year. Almost $1800 extra per year per $100k owed. To pay it off in 15 years would be $784/mo, an extra $90/mo (on top of the extra $165, so $255/mo total) $90 times 180 months. That’s $16k extra.
Cashflow to most investors is worthless. If your property is positive $200/mo, so what? You gonna get 50 properties so you can have $10k per month? Once you have 10 paid off properties you’ll have at least that and 10k in cashflow even if you have a. Property manager.
Saying your tenant is paying the interest on your mortgage is like saying you can gamble at the casino when you’re ahead because you’re playing with the houses money. It’s not the casino’s money when it’s in your hands and the tenant isn’t paying the interest, you are. Otherwise why bother shopping interest rates, the tenants paying it anyway.
If you can afford the 15 year go for it.
In your example for every $100k:
$695/mo and $38.6k balance in 10 years vs $529/mo and $81k balance. So giving up $165/mo (an extra $19,800) lowers your balance by $42,500. that means your average balance for 10 years ($9900) earns $23,700
If $165/mo makes a rental property a bad deal, don’t buy it. It’s saving you $198/mo in interest. plus for the 2nd 15 years your cashflow will be plus $529/mo.
So 15 years of minus $165 and then 15 years of plus $529.
Great feedback Bill. Appreciate the breakdown. I suppose it all boils down to being able to afford the extra $ for the 15-year so by the time retirement hits, the property is generating real income. If this single property involves additional cash flow from my pocket, how do other investors free up to acquire additional properties? Let's say If I go to the bank for property #2 in 4 years, would they look at my DTI and notice that it is significantly higher on the 15-year for property #1? Thereby shutting down additional loans for a second investment. The goal would be to have a few properties generating income over a 20 year horizon. I'm a late starter in the game at age 46, but love the idea of income properties. Just grounding myself in reality of the numbers.
If you pay $100k for a $100k property and get $10k/year in CF, it will take you 10 years to break even...which i when you start turning a profit.
If you pay $20k as a DP for that same property, and only get $5k/year in CF, it will take you only 4 years to break even.
If you had that same $100k you could buy 5 $100k properties at $20k each (DP's) with eadh making only $5k/yr in CF for a total of $25k/year in CF...and all 5 properties break even over that same 4 year period. So, from years 6 - 10, the 2nd REI is profiting $25k/year from their properties.
So, by the time the 10 year mark rolls around, and the 1st investor starts making a profit, the 2nd investor has already made $150k in profit. If neither investor buys additional properties, then after year 10 the 1st investor continues to make $25k/year and the 1st makes only $10k/year.
If each buys added properties whenever the CF accumulates enough to buy them using the same method all the way through, the 1st investor can buy their 2nd property in year 11, then in year 6, etc...
The 2nd investor can start buying in the first year (6th property...and $30k in CF now), then the 7th in year 2 ($35k/yr), and the 8th and 9th in year 3 ($45k/yr), and so on.
Now I'm not saying I would be buying just SFH all the same. Way too many properties to manage...by anyone. Stating the number of properties as they accumulate is based on the CF gained...which could just as easily be invested in larger properties or commercial.
There are plenty of people making positive cashflow in DC. It takes work but he have to buy in to the right deal. I would never enter any rental unless it cashflows. Why get into something where I'm losing money?
Cash flow doesn’t equal profit and lack of cash flow doesn’t equal lack of profit or “losing money”.
I can show you a property that’s making $1500/mo while cash flowing negative $500/mo. I could extend the loan out to 30 years and the cash flow would be a couple hundred dollars extra for those 15 years. But instead I’m 2 years from that 1 property cash flowing $3,000/mo. It’s a 2000sf townhome with the same renter for last 7 years.
I retired after 5 years by paying off 5 properties as fast as possible. Then I coasted for awhile and I still have 4 loans left but I sold my primary to move in to one of my rentals. After two years I’ll sell it and with the tax saving pay those 4 loans off.
I’m just saying there’s a lot of power in the cash flow of paid off properties. I understand if your really young or don’t have the income or desire to retire early. But OP said he was 46 and doubt he hopes to have a bunch of mortgages in his 70’s.
Real estate, at least buy and hold is a pretty simple game where time heals most mistakes. My biggest complaint is about how slow/boring it is. But I try to get over it.
Masud: as far as getting more loans if you’re having problems getting loan 2-10 try another lender. I borrowed almost $2million for 10 loans in 5 years while unemployed only using rental income.
Ps. I was able to get half of those by moving to a new primary every year. I did that for the lower rates and better terms. I then turned them in to rentals and moved. The other half I bought at the same time as rentals from the get go as I didn’t want to wait 10 years to buy my first 10 properties so I paid the price in terms of higher rates.
The 15 year will cut into your cash flow. You can always do the 30 year and pay it down over time. Run the numbers and see where you are at with cash flow after all expenses.
@Bill Brandt- thanks for showing how you managed to do it. Very accurate that I want these notes paid off if by the time I’m 65! Question- did you buy around you or outside the state/far away counties? Also what types of lenders did you have luck with for loans 2-5? Were you putting 20-25% down?
@Masud Khan I have done it both ways on my properties, some with 15 year and others with 30 years. I really have mixed feelings on the subject. The cash flow is great because every month you are putting money in your pocket. So adding properties is no burden. My 15 year loans cash flow, but it is vapors so any serious expense will be out of pocket. That being said, the equity growth in the 15 year properties is insanely fast and you avoid massive amounts of interest.
In your situation, I would opt for the 3.1% loan at 15 years. That is just too good to pass up. When you consider inflation is around 3%, you are basically getting free money.
@Joe Splitrock appreciate the insight! In our market, home values have been steadily rising given all the stable income from the Us government/agencies and being a technology hub. I’ll just have to be very conscious of free cash flow to put towards a 15 year.
@Masud Khan I agree that 15 year sounds more appealing. Scott Jelenik put it best when he said “30 years is a life sentence” I’m following his slow flip model. Borrow money for 5 years to purchase property. Find tenant buyer to fix up and live there or rent out. Make nothing until paid off. After 5 years the house is paid off and you cash flow the entire rent amount with no repairs or maintenance. I’m working to gain 20 of these in the next two years. In my market in Birmingham Al, that’s $500 cash flow per house after taxes and insurance. 20 houses allows for $10,000 per month in cash flow. An interesting model. Good luck to you!
First of all, DC is a strong market and if you are thinking of retirement, I think the 15-year option forces you to pay off the mortgage quickly in time for retirement.
Personally, I am split on this discussion too. But in your case, I think the 15-year option is preferable.
They were all local properties except the example I used. It's on Lake Minnetonka in MN where I plan to spend my summers when my wife retires. That allowed me to lock down our retirement home, spend anything I wanted on upgrades I would appreciate when I lived there in the future, and get it paid off before I moved in to is as my primary as I won't be able to deduct the interest once we live there as we take the standard personal deduction.
If las vegas is common example of a city, there is literally 2-5 blocks sometimes between ok and very nice neighborhoods. Their's a dividing street down the middle and you really want to be west of it because of the city officials and utilities. I assume the same is true of other cities and how would you know that without spending a good amount of time and/or finding the right guide. I grew up in MN so I felt comfortable buying lake front property.
I meant what I said about time healing most real estate mistakes. My biggest regrets are the 5-10 houses I didn't buy because the seller wouldn't budge off a price that was $5k more than I had paid or was paying that week on another house. Of course they're all worth another $250k each and I can see them from my other rentals.
Im sure this has already been said, but you can pay off a 30 yr mortgage in 15 yrs. It only works with a 30 yr mortgage though, and you would have to check with your lender on their pre-payment penalties (this strategy usually works with most banks because your still not paying it off quick enough).
What you would do is take your normal monthly payment, and addition to that pay next months principal. This principal is usually only a couple hundred dollars. The way the loan is amortized, when you pay that extra principal, its like making your monthly payment twice in one month. Do that for 15 yrs and your loan is completely paid off!
@Joe Villeneuve - thanks for answering this and to @@Masud Khan for asking it. I echo his thought that many calculators tell you to factor all of the cap ex and maintenance out which has seriously impacted some of my bigger deal analyses.
@Masud Khan 30 year.... chances are that you wont keep the property for 15 years, so why worry about paying off the mortgage?
Theres no reason to keep a property that long.... after 7-10 years you'll start hemorrhaging money because your capex items will need to start being replaced. Buy on a 30 year, make cashflow, sell in 7 years and 1031 exchange the gain into larger properties. Repeat 3 times and if done right you'll, more than likely, have a paid off apartment building
I say go for a 15 year mortgage. That's what I did on my first rental house. In the past five years it's appreciated like crazy and I'm so excited that it is going to be paid off in 10 years. I got 30 year loans with my next four house purchases, but I'm so glad I did the 15 for the first one.
@Masud Khan 30 year.... chances are that you wont keep the property for 15 years, so why worry about paying off the mortgage?
Theres no reason to keep a property that long.... after 7-10 years you'll start hemorrhaging money because your capex items will need to start being replaced. Buy on a 30 year, make cashflow, sell in 7 years and 1031 exchange the gain into larger properties. Repeat 3 times and if done right you'll, more than likely, have a paid off apartment building
Agreed. It's also rather risky to have a huge chunk of your equity in one property and one LLC. Spread it out across multiple properties and LLCs to defray some of your risk.