I have been having a philosophical debate with my partner and wanted your opinions. Our first property has worked out really well as we have cash flowed since day one, have a great renter and were able to buy a property at a discount that had pretty much all the major stuff in great condition.
On that property, we did a 15 year term mortgage to minimize the interest costs during the life of the loan recognizing that our cash flow would be less. We made sure to run our analytics to ensure positive cash flow in this scenario prior to buying.
As we prepare to purchase our 2nd property, I have been opining for a 30 year mortgage to generate improved cash flow. My position is that the increased cash flow will create a bigger/better buffer should any major CapEx befall us as well as allow for the ability to pay out income vs. have increased savings to be put to the next property. In addition, if we don't incur significant expenses, we could always pay extra on the mortgage.
In short, I feel like there are more options with the 30 year term, especially since we are buy and hold investors.
Any thoughts or opinions one way or another?
Thanks for your time.
Make sure debt has no early pre-pay penalty. You could always pay extra then required to knock down years left on the mortgage if you want.
15 years is just strapped to a higher payment.
This is the cheapest way to borrow money. You want to go out as long as possible.
& as Joel said you always have the option to pay early if you want to, but don't HAVE to.
If you are disciplined (most are not) I suggest getting the 30 year fixed rate for a few reasons. One obvious is the better cash flow. But more importantly it allows the option of freeing up the additional cash savings for you to control. If you are disciplined enough (I use auto pay) to make additional principle payments each month then your 30 year can easily turn into a 15 year amortization (or 20 or 18 - whatever). Figure out how much additional principle you need to put in each month and stick to it.
The nice thing I like about this strategy is you control the money flow. There may be a period of time (short term hopefully otherwise this idea falls apart) where you need to divert that additional principle back into your accounts. You don't have that freedom with a 15 YR. The bank wants their share each month.
If you don't ever see the extra $ being needed and you can get cash flow to hit or exceed your target then 15 YR is fine.
I just always like to be in control of my money for as long as I can prior to and in this scenario during your next investment.